The fiscal effects of work-related tax expenditures in Europe

Publication type

Research Paper

Series Number

A2015-4

Series

GEN Working Papers

Authors

Publication date

May 15, 2015

Summary:

The paper examines the fiscal impacts, and the associated
welfare cost, of marginal reforms to work-related tax relief in five European
countries. We combine a theoretical model of labour supply with micro-simulation
results from an EU-wide model, which allows us to capture the interaction
between the specific tax incentive and other relevant provisions of the
tax-benefit system along the entire earnings distribution. We find that changes
in labour supply decisions – both at the extensive (participation) and at the intensive margin (hours worked) – have significant impacts on 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. For policies strongly
targeted at the bottom of the earnings distribution, the reform might even
bring about a net revenue loss, depending on the calibration of the labour
supply elasticities to reflect heterogeneity across types of workers. The
welfare effect of contractions to these tax schemes could be far from
negligible.

Subjects

Link

https://ideas.repec.org/p/gov/wpaper/1504.html


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