Employment Effects of Income Tax Reforms: Lessons from Slovakia

Michal Horvath and Zuzana Siebertova (siebertova@rrz.sk)
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Zuzana Siebertova: Council for Budget Responsibility

Working Papers from Council for Budget Responsibility

Abstract: Fundamental income tax reforms are usually justified by or opposed because of large employment implications. The employment gains and losses are supposed to originate from various behavioural and dynamic effects of tax reforms over the medium to long term. To test the limits of such arguments, we study hypothetical radical measures designed to have potentially large employment effects inthe context of Slovakia. A close inspection of the different implications of such tax reforms for adjustment on the extensive margin of the labour market reveals that promises or worries of large employment effects have little empirical support. This is because labour supply responses to ‘making work pay’ are small, the requirement of revenue neutrality limits the extent to which (dis)incentivising work is feasible, and because income effects arising from positive assortative mating within families counteract total individual-level effects. Our framework suggests the focus of tax reformers should be on the variation in effective labour supply coming from intensive margin effects.

Keywords: microsimulation; dynamic general equilibrium; employment; labour supply elasticity; tax reform (search for similar items in EconPapers)
JEL-codes: E24 H24 H31 J22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-11
New Economics Papers: this item is included in nep-lma, nep-mac, nep-pbe and nep-pub
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Working Paper: Employment Effects of Income Tax Reforms: Lessons from Slovakia (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cbe:wpaper:201903

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