Embed Size (px)
Citation preview
Joint Research Centre the European Commission's in-house science service
Serving society
Stimulating innovation
Supporting legislation
.
Taxation and growth
Salvador Barrios Joint Research Centre Unit B2, Fiscal policy analysis
The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They should not be attributed to the European Commission. Any mistake and all interpretations are the authors' and theirs only.
Tax reforms & growth
But are taxes a significant determinant of growth?
Does taxation matter for growth? Empirical evidence
Tax ranking:
1. Property taxes 2. Consumption taxes 3. Personal income taxes 4. Corporate taxes
But the evidence remains mixed
What does the optimal tax theory say?
"The key insight from the standard optimal income tax models is that
marginal rates of tax and benefit withdrawal should be higher when
people’s choices of how much to work are relatively unresponsive to
them and when the government is relatively keen to redistribute
resources from rich to poor". (Mirrlees review, 2010, Ch.2, p.90).
Can we build a general framework to assess the impact of tax reforms on growth against this background?
The theory provides only some guidance…
1. The theory is grounded on comparative static analysis of the
deadweight loss of taxation (behavioural reponses)
2. Provides guidance for marginal (reform) assessment…not on
the level or structure of taxation
3. The evidence suggests that behavioural responses vary
widely depending on the business cycle, the country, the
population most directly affected, etc.
4. And there are many other (more important) factors
explaining growth: catching-up, human capital, education.
Why should growth matter when assessing tax policies?
Growth matters for assessing the cost of
tax reforms
1. Key question #1: are tax reforms self-financed?
3. Key question # 3: Who bears the burden of tax
reforms?
2. Key question # 2: How are people/companies
likely to react to tax reforms?
1. Key question #1: are tax reforms self-financed?
Dynamic scoring of tax reforms
• What is the direct fiscal impact of tax reforms?
• How large are second-round effects?
Dynamic scoring approach
• Combine microsimulation model (EUROMOD) with macro-structural models (QUEST)
• To assess growth and employment effects + fiscal and redistributive impact
2. Key question # 2: How are people/companies
likely to react to tax reforms?
Work more or less ?
Look for a job ?
Consume or save ?
People
Companies
Invest or retain cash?
Finance investment through debt, equity or retained earnings?
Hire, fire workers?
People
Companies
3. Key question # 3: Who bears the burden of tax
reforms?
Tax changes affecting production costs can lead to changes in wages/prices in order to compensate for their impact.
Workers/consumers reaction can force companies to partially absorb changes in personal income tax or consumption taxes.
What the dynamic scoring allows is:
To make explicit assumptions regarding the potential
behavioural effects and tax incidence of tax
reforms.
To consider the interactions between agents in
product and labour markets in order to determine the
resulting price and wages.
Price and wage effects are key to quantify the potential
macroeconomic impact of tax policy changes.
To assess the fiscal impact of tax reforms accounting for
their macroeconomic consequences, including growth
and employment effects.
Example: Impact of progressive tax reforms
Macroeconomic impacts
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
2018 2019 2020 2021 2022 2022+
GDP
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2018 2019 2020 2021 2022 2022+
Employment
-0.14
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
0
2018 2019 2020 2021 2022 2022+
Investment
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
2018 2019 2020 2021 2022 2022+
Government balance (%GDP)
Source: Barrios, Ivaskaite, Maftei, Narazani and Varga, (2018) Progressive tax reforms in flat tax countries, JRC Working Papers on Taxation and Structural reforms 2/2018. https://ec.europa.eu/jrc/en/publication/eur-scientific-and-technical-research-reports/progressive-tax-reforms-flat-tax-countries
Example: Impact of progressive tax reforms
Redistributive impacts
Example: Impact of progressive tax reforms
Winners & losers
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10
Hungary
Winners Losers
Summary
• The growth impact of taxes is very relevant for assessing tax reforms
• However the assessment of this impact should be done on reform by reform basis.
• The design of tax reforms matters for their direct fiscal impact, behavioural/incentives effects and tax incidence. • Assumptions and models used for such an assessment should be as transparent as possible
Conclusion
Are taxes a significant determinant of growth?
