Article (Scientific journals)
Should euro area countries cut taxes on labour or capital in order to boost their growth?
Clerc, Pierrick; Castelletti Font, Barbara; Lemoine, Matthieu
2018In Economic Modelling
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Keywords :
Fiscal reforms; DSGE model; Taxes, Government spending
Abstract :
[en] The large imbalances within the euro area have led to a renewed interest in tax policies that could reduce labour costs and thus improve competitiveness and growth. In this paper, we consider whether it would be more growth-enhancing for euro area countries to, instead, use capital income tax cuts. To address this issue, we focus on the open-economy dimension and make simplifying assumptions concerning the completeness of insurance markets. Using a DSGE model calibrated for France within the euro area, we show that the increase in output resulting from tax cuts on capital income would indeed be higher than the increase in output resulting from tax cuts on labour, both in the short and long run. Importantly, the strong response of output to capital income tax cuts appears to be partly explained by the particularly high level of capital income taxes in France. Moreover, such tax cuts would be less efficient if they were expected to be only temporary. Finally, we illustrate our main points through a recent fiscal package implemented in France, which combines labour and capital income tax cuts. After briefly assessing this package, we find that investment and real output would have been more strongly boosted in the medium run if this package had been focused to a larger extent on reductions in capital income taxes.
Disciplines :
Macroeconomics & monetary economics
Author, co-author :
Clerc, Pierrick ;  Université de Liège - ULiège > HEC Liège : UER > Macroéconomie et pensée économique
Castelletti Font, Barbara
Lemoine, Matthieu
Language :
English
Title :
Should euro area countries cut taxes on labour or capital in order to boost their growth?
Publication date :
2018
Journal title :
Economic Modelling
ISSN :
0264-9993
eISSN :
1873-6122
Publisher :
Elsevier, Amsterdam, Netherlands
Peer reviewed :
Peer Reviewed verified by ORBi
Available on ORBi :
since 04 February 2021

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