Dynamic scoring of tax reforms in the European Union - JRC Working Papers on Taxation and Structural Reforms No 3/2016
In this paper, we present a dynamic scoring analysis of tax reforms for European countries. In this analysis we account for the feedback effects resulting from the adjustment in the labour market and for the economy-wide reaction to tax policy changes. We combine the microsimulation model EUROMOD, extended to incorporate an estimated labour supply model, with the new Keynesian DSGE model QUEST, used by the European Commission for analysing fiscal and structural reform in EU member states. These two models are connected in two ways: by introducing tax policy shocks in QUEST, derived from computing changes in implicit tax rates using EUROMOD; and by calibrating the elasticity of labour supply and the non-participation rates, by skill categories, in QUEST from values calculated using EUROMOD and the estimated labour supply function. Moreover, we discuss aggregation issues and the consistency between the micro and macro modelling of labour supply and interpret the model interaction in terms of tax incidence analysis. We illustrate the methodological approach with the results obtained when scoring specific reforms in three EU Member States, namely, Italy, Belgium and Poland. We compare two different scenarios – one in which the behavioural response to tax changes over the medium term is ignored and another scenario where this behavioural/micro-dimension is embedded into the microsimulation model. In this particular set-up, we do not find evidence of strong second-round effects, and the fiscal and distributional effects of the reforms tend to overlap in both scenarios. We attribute these results to existing rigidities in labour and product markets, which have shrunk further the small tax policy shocks introduced into the macroeconomic model.
BARRIOS Salvador;
DOLLS Mathias;
MAFTEI Anamaria;
PEICHL Andreas;
RISCADO Sara Maria;
VARGA Janos;
CHRISTIAN Wittneben;
2016-12-12
European Commission
JRC104193
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