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Should euro area countries cut taxes on labour or capital in order to boost their growth?

Barbara Castelletti (), P. Clerc and Matthieu Lemoine ()

Working papers from Banque de France

Abstract: The large imbalances within euro area have led to renew interest in tax policies that could reduce labour costs and thus improve competitiveness and growth. In this paper, we consider whether it would be more growth-enhancing for euro area countries to, instead, use capital income tax cuts.To address this issue, we focus on the open-economy dimension and make the simplifying assumption of complete insurance markets. Using a DSGE model calibrated for France within the euro area, we show that the increase in output resulting from tax cuts on capital income would indeed be higher than the increase in output resulting from tax cuts on labour, both in the short and long run. Importantly, the strong response of output to capital income tax cuts appears to be partly explained by the particularly high level of capital income taxes in France. Moreover, such tax cuts would be less efficient if they were expected to be only temporary. Finally, we illustrate our main points through a recent fiscal package implemented in France, which combines labour and capital income tax cuts. After briefly assessing this package, we find that investment and real output would have been more strongly boosted in the medium run if this package had been focused to a larger extent on reductions in capital income taxes.

Keywords: Fiscal reforms; taxes; government spending; DSGE model. (search for similar items in EconPapers)
JEL-codes: E62 E63 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-pbe
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:634

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