The Fiscal Effects of Work-related Tax Expenditures in Europe

Salvador Barrios (), Serena Fatica, Diego Martínez and Gilles Mourre

Public Finance Review, 2018, vol. 46, issue 5, 793-820

Abstract: This article examines the fiscal impact, and the associated welfare cost, of marginal reforms to work-related tax relief in five European countries. We combine a model of labor supply with microsimulation results to capture the interaction between the specific tax incentive and other provisions of the tax-benefit system along the entire earnings distribution. We find that changes in labor supply decisions—both at the extensive and at the intensive margin—significantly affect the revenue gain from the simulated reforms. Our results suggest that at least one-fourth of the extra tax revenues collected through a reduction in work-related tax incentives is washed away following labor supply adjustment, notably due to lower participation by individuals most at risk of exclusion. In some instances, the erosion of the initial revenue gain becomes substantial. The welfare effect of contractions to these tax schemes could be far from negligible.

Keywords: tax expenditures; labor supply; marginal welfare costs (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: The fiscal effects of work-related tax expenditures in Europe (2015)
Working Paper: The fiscal effects of work-related tax expenditures in Europe (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:46:y:2018:i:5:p:793-820

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