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The Fiscal Effects of Work-related Tax Expenditures in Europe

Author

Listed:
  • Salvador Barrios
  • Serena Fatica
  • Diego Martinez-Lopez
  • Gilles Mourre

Abstract

This article examines the fiscal impact, and the associated welfare cost, of marginal reforms to work-related tax relief in five European countries. We combine a model of labor supply with microsimulation results to capture the interaction between the specific tax incentive and other provisions of the tax-benefit system along the entire earnings distribution. We find that changes in labor supply decisions—both at the extensive and at the intensive margin—significantly affect 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 labor 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. The welfare effect of contractions to these tax schemes could be far from negligible.

Suggested Citation

  • Salvador Barrios & Serena Fatica & Diego Martinez-Lopez & Gilles Mourre, 2018. "The Fiscal Effects of Work-related Tax Expenditures in Europe," Public Finance Review, , vol. 46(5), pages 793-820, September.
    • Handle: RePEc:sae:pubfin:v:46:y:2018:i:5:p:793-820
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    References listed on IDEAS

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    Cited by:

    1. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2019. "Dynamic Scoring Of Tax Reforms In The European Union," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 38(1), pages 239-262, January.
    2. Salvador Barrios & Flavia Coda Moscarola & Francesco Figari & Luca Gandullia, 2020. "Size and distributional pattern of pension-related tax expenditures in European countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1287-1320, October.
    3. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    4. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

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    More about this item

    Keywords

    tax expenditures; labor supply; marginal welfare costs;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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