Working Paper 07-17 - Tax Expenditure and the Cost of Labour Taxation - An application to company car taxation

Benoît Laine and Alex Van Steenbergen

Working Papers from Federal Planning Bureau, Belgium

Abstract: The goal of this paper is to estimate the efficiency cost of one additional euro of revenue through the personal income tax system, considering its simultaneous effects on the labour market and the transport market. More precisely, we seek to derive estimates of the Marginal Excess Burden of marginal personal income tax rates in Belgium considering the subsidization of company cars. We find that taking into account of welfare losses in the transport market adds 5-7 cents to the welfare cost of an additional euro of tax revenue, compared to models that consider only the effects on the labour market. The cost of raising the top marginal tax rate rises by 28% to 58% depending on the model assumptions. As an aside, we estimate tax expenditure on the transport sector via the personal income tax system to be 1.9 billion euro. We conclude that there is scope for welfare improving by base broadening and rate cutting. The framework is applied to analyse the merits of cash-for-car proposals.

Keywords: Efficiency; Optimal taxation; Externalities; Redistributive effects; Personal income tax; Transport (search for similar items in EconPapers)
JEL-codes: H21 H23 H24 R41 (search for similar items in EconPapers)
Date: 2017-06-28
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Persistent link: https://EconPapers.repec.org/RePEc:fpb:wpaper:201707

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