Which taxes should be reduced to foster employment and growth? A Fiscal simulation framework for Madagascar

Josué R. Andrianady

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a structural fiscal simulation model to evaluate the macroeconomic and budgetary effects of alternative tax reform scenarios in Madagascar. The model examines the impact of reductions in value-added tax (VAT), personal income tax (IRSA), employers’ social contributions, and customs duties, both individually and in combination, on output, employment, and public revenues. Simulation results show that isolated cuts in VAT or IRSA have negligible effects on production and employment but lead to substantial revenue losses. By contrast, lowering employers’ social contributions stimulates employment (+2.8%) and output (+1.8%) while limiting fiscal costs, highlighting the sensitivity of labor demand to labor costs. Reductions in customs duties modestly increase output (+1.9%) but do not affect employment significantly and generate large revenue shortfalls. A combined reform package maximizes output (+3.7%) and employment (+2.8%) but at a significant cost to public revenues (-39%), raising concerns about fiscal sustainability. Overall, targeted reductions in labor taxation emerge as the most effective instrument for promoting employment and growth while preserving fiscal balance in a developing-country context. The model provides a first-order analytical framework for Madagascar and a benchmark for future studies incorporating informality, distributional effects, and dynamic adjustments.

Keywords: Fiscal policy; Tax reform; Employment; Public revenues; Madagascar. (search for similar items in EconPapers)
JEL-codes: E23 E61 E62 H26 H30 (search for similar items in EconPapers)
Date: 2026
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