The Benefits of Environmental Fiscal Reforms in an Integrated Europe

This paper analyses the effects of an environmental fiscal reform where the environmental tax revenue is used to reduce the tax burden on labor in order to increase employment. The study tries to assess the benefits generated by this type of reform in an integrated Europe where different degrees of tax harmonization can be achieved. The differential impact of cooperative fiscal reforms versus noncooperative ones is quantified through the use of a newly developed general equilibrium model. The results suggest that only a high degree of harmonization, in which both revenue and expenditure policies are coordinated, can provide significant environmental and employment benefits.     

Lower Tax Progression, Longer Hours and Higher Wages

The impact of tax reforms that decrease income tax progression is analysed in an equilibrium search model with wage bargaining and endogenous individual working hours. Working hours are either bargained together with the hourly wage (case 1) or determined solely by workers after bargaining over the wage (case 2). In both cases reducing tax progression increases working hours of employed and, more interestingly, unambiguously increases wages and unemployment. Wages and unemployment rise more and working hours and production less in case 1 compared to case 2, probably making case 2 countries best suited for such tax reforms.
JEL Classification : H 24; J 22; J 41     

The Credit Channel of Capital Tax Policy

A neoclassical growth model is augmented by a corporate sector, financial intermediation, and a set of tax rates. In this setting, capital structure is determined by the interplay between a tax advantage of debt finance and costly state verification entailed by asymmetric information. Effects of capital tax reforms are investigated with a special focus on this micro‐founded credit channel of tax policy. The theoretical part of the paper establishes a new, institution‐based view on the motivation of debt finance in general equilibrium and derives financial and real effects of private and corporate income tax policies. Using a calibration with U.S. data, the applied part demonstrates that tax cuts cause significant adjustments of capital structure. Nevertheless, it turns out that the credit channel generates relatively small effects of tax reforms on consumption, investment, and growth.     

Welfare impacts of equal-yield tax reforms in the UK economy

A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal-yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal-yield tax experiments welfare gains up to 1.4% of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05% of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.     

On Cost Benefit Rules for Green Taxes

This paper concerns the welfare effects of a green tax reform in a dynamic general equilibrium model with preexisting taxes on labor income and capital income. In comparison with previous studies on green taxes in dynamic models, which have focused their main attention on long run effects of such reforms, I derive cost benefit rules for a change in the tax mix by using the properties of the value function in optimal control theory. This enables me to relate the welfare effect of a change in the tax mix to responses in employment, the capital stock, (flow) emissions and the stock of pollution along the whole general equilibrium path. Another contribution of the paper is to examine under what conditions an emission tax, which is set permanently below the marginal damage of pollution, is welfare superior to an emission tax path that fully internalizes the external effect.     

Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint

The literature on indirect tax reforms in pollution‐ridden economies is quite limited. This paper, using a general equilibrium model of a perfectly competitive small open economy with both production‐ and consumption‐generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.     

Macroeconomic effects of an indirect tax substitution

We study an indirect tax reform in a general equilibrium model with imperfect competition for both the Cournot and the Free entry equilibria. We show that it is possible to attain a positive balanced budget multiplier by means of a substitution of specific by ad valorem taxation. Moreover, although any tax substitution causes higher prices and the flow up of firms in the long-run, the Free entry equilibrium output can increase with respect to that of the Cournot equilibrium. Finally, in contrast with the partial equilibrium, welfare decreasing tax reforms are likely to occur even when the balanced budget multiplier is positive.      

Tax reform in a two-class growth model

This paper analyzes the welfare and distributional effects of tax reforms in a two-class model with exogenous labour supply. It extends the empirically calibrated, standard life-cycle model to include both pure life-cycle savers and households with an altruistic bequest motive. The tax reform simulations cover the move from an income to a wage and a consumption tax, respectively. The role of borrowing constraints is studied and a dynamic analysis of tax reforms using a static expectation approach is performed. The simulation results indicate that the two tax reforms have different impacts on the welfare of the two classes: while the pure life-cycle savers are better off with the consumption tax, the altruistically motivated households gain more under a wage tax. The results further show that while the introduction of a consumption tax is distributionally neutral, the move to a wage tax substantially increases income and wealth inequality.     

Green taxes and uncertain timing of technological change

This paper concerns the role of environmental taxation in a model with endogenous technological change, where the latter implies that natural inputs become more productive. The timing of technological change is, in turn, uncertain and the likelihood of discovering the new technology is related to the amount of resources spent on R&D. The analysis is based on a dynamic general equilibrium model. One purpose of the paper is to design a policy so as to internalize the external effects arising from pollution and R&D. Another is to develop cost benefit rules for green tax reforms, when the initial equilibrium is suboptimal.     

Population Aging,Health Care,and Fiscal Policy Reform: The Challenges for Japan

We construct a transition analysis based on a general equilibrium life‐cycle model to investigate the effects of aging, and we evaluate various policy alternatives designed to lessen the negative influence of aging. In particular, we analyze reforms of insurance benefits and tax financing tools that were recently the focus of a great amount of attention and debate in Japan because of the tense financial situation there. We show that although the potential reforms improve the welfare of future generations, the political implementation of such reforms is difficult because of the large welfare costs for the current population. Our analysis suggests that a gradual reform with an intergenerational redistribution will be more politically implementable than an immediate reform.     

The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.     

Welfare Analysis of Pension Reforms in an Ageing Japan

This paper uses a computable general equilibrium model with overlapping generations to explore the effects of different public pension schemes on economic welfare, and intergenerational and intragenerational equity. Besides the benchmark case based on the 2004 public pension reform, the present paper considers two alternative reforms: financing the basic pension benefit through a consumption tax, and eliminating the earnings‐related pension benefit. The simulation results suggest that even the consumption‐tax financing of only the basic pension, namely, the combination of both reforms, might not improve overall economic welfare, although it increases economic output by inducing capital formation.     

Building a computable general equilibrium tax model for Italy

In this paper, we develop a multi-sectoral computable general equilibrium tax model for Italy allowing for a number of fiscal tools. We illustrate the methodology for modelling and accommodating the full range of direct and indirect taxes into the national general equilibrium model. In particular, we build a commodity tax matrix by commodity, source, user and tax type; and a production tax matrix by industry and tax type. We also put a special emphasis on the institutional sector accounts, incorporating a detailed system of equations. Our model provides a powerful tool for acquiring new insights in fiscal policy analysis, through the assessment of tailored tax reforms, which can consist of either changes in tax rates and tax bases for indirect and direct taxes. Finally, to validate the model we perform an equalizing Value-Added-Tax rates reform. We find that a budget-neutral uniform tax rate reform would be GDP and welfare improving. However, results across agents and sectors vary.     

Optimal Export Taxes, Welfare, Industry Concentration, and Firm Size: A General Equilibrium Analysis

By using an imperfect-competition model, it is shown that an export tax, optimal in partial equilibrium, is upwardly biased and may not be optimal in a general equilibrium setting with free entry/exit. It is shown also that the export tax has an ambiguous impact on firm size. The results of an applied general equilibrium model for the Turkish economy suggest that the export tax estimated with the PE formula is larger by a small factor than the computed export tax. However, the export tax leads to an increase in firm size and, most importantly, to a social welfare loss.     

The impact of the 2008 German corporate tax reform: A dynamic CGE analysis

In this paper we develop the dynamic CGE model, ifoMod, which is designed to analyse the impact of fundamental tax reforms and in particular capital income tax reforms for Germany. The model is in line with neoclassical growth theory and features all important behavioural interactions between the four major building blocks of an economy including the firm and household sector, the government and the rest of the world. We consider firms of different legal forms which all face an intertemporal investment problem, a financing problem w.r.t. the optimal choice of debt and equity financing as well as a factor input problem when deciding on the optimal amount of different skill types of labour employed. We show the impact of different types of taxes on the behavioural margins of firms and households. The conducted simulation shows the impact of the latest German corporate tax reform of 2008 on the German macroeconomic variables such as investments, GDP, consumption and household's welfare.     

Export Product Diversification and Public Revenue’s Dependence on Resource Revenue

ABSTRACT

This article tries to reconcile two major priorities for countries, notably resource-rich countries on the international development agenda: export product diversification with a view to helping them better integrate into the multilateral trading system and tax reforms with a view to reducing the dependence of total public revenue on resource revenue, and therefore developing a more sustainable stream of public revenue. The analysis therefore involves examining empirically the impact of export product diversification on countries’ overall public revenue dependence on resource revenue, this dependence being measured by the share of resource revenue in total public revenue. The empirical analysis shows that export product diversification exerts a negative and significant impact on resource revenue share of total public revenue, and therefore could help facilitate tax reforms towards lower resource revenue dependence. Hence, while tax policy is the main policy tool to conduct tax reforms, export product diversification would likely contribute to facilitating the implementation of these reforms.     

Green tax reforms and habits

Using a dynamic general equilibrium model, we explore the role of habit formation when analyzing green tax reforms under the double dividend hypothesis. We assume increases in energy taxes and adjust capital taxation in a revenue-neutral framework to evaluate the effects on welfare. Since the existence of an environmental dividend is uncontroversial, we mainly focus on the efficiency dividend. Our findings show that, when taxes on household energy consumption increase, habits and transitional dynamics alter household decisions, and change the efficiency dividend. However, when the tax increase is on energy used as an input, reform always induces a welfare cost in terms of efficiency. In this case, habits play a less important role.     

Income distribution and equilibrium multiplicity in a stigma-based model of tax evasion

This paper incorporates continuous income distribution into the stigma-based model of tax compliance. The paper investigates the effect of income distribution on the existence of multiple equilibria, and characterizes the conditions under which multiple equilibria emerge. Precisely, multiple equilibria exist if taxpayer incomes are sufficiently homogeneous, because the ‘social coordination effect’ dominates the ‘individual characteristics effect’. Numerical simulations show that the main proposition is robust to allowing two-step audit policies on the part of the tax agency, under the presumption that the best (or good) equilibrium is selected whenever there are multiple equilibria. As a byproduct, the effect of various forms of tax reforms on the optimal two-step audit policy, the equilibrium compliance, and fiscal revenue is analyzed.     

Flat income taxation,redistribution and labour market performance

A flat tax rate on labour income has gained popularity in European countries. This article assesses the attractiveness of such a flat tax in achieving redistributive objectives with the smallest distortions to employment. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. Only flat tax reforms that reduce redistribution will raise employment. This finding bolsters the notions from optimal tax literature regarding the equity-efficiency trade off and the superiority of nonlinear taxes to obtain redistributive goals in an efficient way.     

Macroeconomic effects of structural reforms and fiscal consolidations: Trade-offs and complementarities

This paper studies the impact of product and labour market structural reforms and the effects of their joint implementation with alternative debt consolidation strategies. The set-up is a dynamic general equilibrium model calibrated for the Greek economy. The results show that structural reforms produce important long-run GDP gains that materialize earlier, the faster the reforms are implemented. When implemented jointly with fiscal consolidations, structural reforms may amplify the short-run costs of fiscal tightening. The GDP dynamics depend on the fiscal instrument used for public debt consolidation. In the long run, however, there are complementarity gains irrespective of the fiscal instrument used.