Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144766
Authors: 
Attinasi, Maria-Grazia
Prammer, Doris
Stähler, Nikolai
Tasso, Martino
Van Parys, Stefan
Year of Publication: 
2016
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 26/2016
Abstract: 
Budget-neutral tax wedge reductions rank high in the policy agenda of several EMU member states. Using a New Keynesian DSGE model of a monetary union with a complex labour market structure and a comprehensive public sector, we evaluate the macroeconomic and welfare effects of reducing the firms' and workers' labour tax rates under alternative financing instruments. Overall, a tax wedge reduction is beneficial in terms of both welfare and output, as long as the financing measure does not harm private-sector productivity and/or the incentive for private capital investments over-proportionately. While financing the labour tax wedge reduction by an increase in consumption taxation yields most favourable output effects, financing it by a reduction in government spending is more beneficial in terms of welfare as the latter does not imply a policy-induced increase in private consumption costs. We also show that, when we assume that firms can adjust the ex- and intensive labour margin in response to policy changes, a reduction in the workers' and not the firms' burden is most beneficial.
Subjects: 
Fiscal Policy
Tax Reforms
DSGE Modelling
Macroeconomics
JEL: 
H2
J6
E32
E62
ISBN: 
978-3-95729-278-0
Document Type: 
Working Paper

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