The Fiscal Effects of Work-related Tax Expenditures in Europe

The paper 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 labour supply with micro-simulation 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 labour 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 labour 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.

BARRIOS Salvador;  FATICA Serena;  MARTINEZ LOPEZ Diego;  MOURRE Gilles; 

2017-11-09

SAGE PUBLICATIONS

JRC103143

1091-1421,   

http://journals.sagepub.com/doi/full/10.1177/1091142116679729,    https://publications.jrc.ec.europa.eu/repository/handle/JRC103143,   

10.1177/1091142116679729,