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Macroeconomic effects of cost equivalent business fiscal incentives

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  • Houndonougbo, Ahiteme N.
  • Mohsin, Mohammed

Abstract

We investigate the macroeconomic impacts of three fiscal policy instruments that provide temporary business tax incentives: investment tax credit (ITC), wage subsidy, and capital income tax cuts. Using a DGSE model, we set all three policies such that their lifetime tax expenditure costs are identical. We then compare their returns in terms of boost to the economy, revenue recovered, and welfare gains. The ITC policy has the highest lifetime returns in terms of output and investment while the wage subsidy policy generates the highest lifetime returns in consumption and employment. We also find that the wage subsidy policy yield faster results but the ITC policy produces longer-lasting effects. Our dynamic scoring exercise shows that the ITC and wage subsidy policies recover close to 85% of the revenue loss. The capital income tax cut is the least performing policy. Overall, our results suggest that, when their dynamic impacts on the macroeconomy are accounted for, business fiscal incentives are welfare enhancing and partially self-financing.

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  • Houndonougbo, Ahiteme N. & Mohsin, Mohammed, 2016. "Macroeconomic effects of cost equivalent business fiscal incentives," Economic Modelling, Elsevier, vol. 56(C), pages 59-65.
    • Handle: RePEc:eee:ecmode:v:56:y:2016:i:c:p:59-65
    DOI: 10.1016/j.econmod.2016.03.015
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    3. Julia A. Steshenko & Anna V. Tikhonova, 2018. "An integral approach to evaluating the effectiveness of tax incentives," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 4(2), pages 157-173.

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    More about this item

    Keywords

    Investment tax credit; Wage subsidy; Real business cycles; Dynamic scoring; Fiscal policy; Tax multiplier;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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