European Taxes in a Laboratory

Matus Senaj and Milan Vyskrabka (milan.vyskrabka@nbs.sk)
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Milan Vyskrabka: National Bank of Slovakia, Monetary Policy Department

No WP 2/2011, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: Labour tax rates are considerably heterogeneous across European countries. In this paper, we investigate the effects of a policy experiment in which the tax rates levied on labour are harmonised in the member countries of the euro area. Using a four-country DSGE model, we find that shifts in domestic tax rates are the main driver of the total outcome of the policy change while spillover effects are rather limited in the long run. Countries that decrease their total tax wedge boost their economies while countries that increase their tax wedge lose a proportion of output. The adjustment process is rather complicated: a country which gains in the long run may temporarily go through a period of dampened economic activity. The adjustment process is complicated somewhat by the fact that a country which gains in the long run may temporarily go through a period of dampened economic activity. In terms of volatility, the euro area with its homogenous labour tax system may be better prepared to face common area-wide shocks. On the other hand, shocks originating outside the euro area may increase the volatility of euro area output under the homogenous tax regime.

Keywords: tax reform; DSGE model; euro area (search for similar items in EconPapers)
JEL-codes: D58 H20 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2011-12
New Economics Papers: this item is included in nep-dge and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1015

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