The macroeconomic impact of the income tax reductions in Malta

Aaron Grech

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents estimates of the possible macroeconomic impact of the reductions in income tax introduced in the Budgets for 2013 and 2014. The simulations are based on the structural macro-econometric model described in Grech and Micallef (2014). The impact of the reductions on Government revenue, estimated at 0.7% of GDP, is computed using data on chargeable income under the different tax bands from the Inland Revenue Department as at 2013, with future income projected using Central Bank forecasts. The policy should have a positive effect on economic activity, with the impact on GDP peaking at 0.35% in 2016 and stabilizing at just under 0.3% in the medium term. This effect is primarily driven by increased consumption following the boost in disposable income caused by the cuts. While this is complemented by higher investment, the impact is gradually dampened by worsening net exports due to rising domestic prices. Though the policy is in part self-financing as it results in a larger tax base, it should be accompanied by measures to reduce pressure on government finances.

Keywords: Fiscal Policy; Macro-econometric modelling; Malta (search for similar items in EconPapers)
JEL-codes: C5 E62 H20 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-mac and nep-pbe
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Related works:
Working Paper: The macroeconomic impact of the income tax reductions in Malta (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63902

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