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Volume 65, Issue 3

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Labor Tax Harmonization in a Multi-Country Model

Senaj, Matúš; Výškrabka, Milan

Year: 2015   Volume: 65   Issue: 3   Pages: 192-210

Abstract: Labor tax rates are considerably heterogeneous across European countries. In this paper, we investigate the effects of a hypothetical policy experiment in which the tax rates levied on labor are harmonized in the member countries of the euro area. Using a four-country DSGE model, we find that shifts in domestic tax rates are the main driver of the total outcome of the policy change while spillover effects are rather limited in the long run. The short-run adjustment process is rather complicated: a country which gains in the long run may temporarily go through a period of dampened economic activity. In terms of volatility, the euro area with its homogenous labor tax system may be better prepared to face common area-wide shocks. On the other hand, shocks originating outside the euro area may increase volatility in the euro area.

JEL classification: D58, H20

Keywords: tax reform, DSGE model, euro area

RePEc: http://ideas.repec.org/a/fau/fauart/v65y2015i3p192-210.html

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