Public Finances in EMU 2008 The efficiency of tax systems - Shifting taxation from labour to consumption

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1 Public Finances in EMU 8 The efficiency of ax sysems - Shifing axaion fom labou o consumpion Finance Minisy Rome 7 Ocobe 8

2 Toal ax buden in Euope is high. 6 Gaph IV.. : Toal axes (incl. social secuiy conibuions % of GDP % of GDP 3 DK SE BE FR FI IT ATEA-EU-NL DE SI UKU CY ES CZ PT LU BG PL MT IE EL EE LV LT SK RO 5 7 Noe: Japan efes o 995 and 5. Souces: Commission sevices and OECD. USAJAP

3 Tax Buden has sabilised 44 4 Gaph IV..: Evoluion of oal axes (incl. social secuiy conibuions in Euope 97-6 EU-9 (ESA79 EU-7 (ESA95 % of GDP Souce: Commission sevices. 3

4 bu is likely o emain high due o Ageing populaions Low poduciviy gowh in he public seco igh demand elasiciy fo public sevices (educaion healh cae long-em cae ec. New demands fo insuance (globalisaion( globalisaion echnological change ealh elaed expendiues 4

5 Inceased focus on how govenmens aise evenues Incenives (labou( supply and demand human capial fomaion invesmen isk-aking Redisibuion Envionmenal obecives => ow o aise ax evenues efficienly while mainaining he social balance and poecing he envionmen? 5

6 Efficien ax sysems Boad bases low aes Takes mobiliy of ax bases ino accoun Inegae well ax and benefi sysems Simple and anspaen Avoid excessive ax buden on labou 6

7 Paicula challenge is ax wedge on labou Gaph IV..:Maginal ax wedges on labou 7 Tax wedge Change -7 (pp (% BE U SE AT DE FI LU IT EL EU- 5 CZ FR NL DK ES P T P L SK UK IE KO NZ JP AU C CA US NO Noes: % of aveage eanings no childen 7 level (% and -7 change (pp. Souce: OECD. 7

8 Shifing axaion fom labou o consumpion One way o educe ax buden on labou Reduce social secuiy conibuions o pay oll axes and incease VAT Recen policy in Gemany (7 bu no budge balanced. Discussion in ohe counies ( VAT( sociale in Fance 8

9 Shifing axaion fom labou o consumpion advanages ( Consumpion is a boad alenaive base VAT is ax on labou income pofi income and accumulaed wealh => ax base lage => aes can be educed Sable base Subec o ax compeiion o a low degee Adminisaion easy 9

10 Shifing axaion fom labou o consumpion advanages ( Inacive populaion (Conex of ageing populaions can conibue o public finances Accumulaed wealh Wihou adusmen pension benefis educed in eal ems => educed financing needs => aes can be educed => addiional posiive effecs on employmen Wihou adusmen of unemploymen benefis highe labou supply incenives Posiive sho em effecs due o igidiies in labou makes Lage employmen effecs wih ageed ax educion

11 Shifing axaion fom labou o consumpion challenges ( Equiy issues Negaive effecs on low income households wih high popensiy o consume. Inegeneaional edisibuion fom old o young. Compensaion of ansfe ecipiens Inflaion isks (depending on iming and magniude Some mix of diec and indiec axaion likely o be opimal (ax evasion Opimal design of VAT (educed aes Euopean VAT sysem ec.

12 Shifing axaion fom labou o consumpion challenges ( Unilaeal ax shifing vesus coodinaed appoach ( fiscal devaluaion No subsiue fo sucual efoms Tempaion o use evenue geneaing capaciy of he VAT wihou educing labou axaion

13 Simulaions of ax shif QUEST III model global DSGE model Fowad looking agens solve dynamic opimisaion poblems - unde echnological budge and insiuional consains Nominal and eal igidiies Two ypes of households (Ricadian and liquidiy-consained hh Esimaed (Bayesian mehodology (Rao M W. Roege and J. in Veld (8 Economic Modelling (fohcoming Global model (Euo aea Res of EU EU US Res of Wold Simulaions of ax shif of % of baseline GDP Thee scenaios: Coodinaed Euo Aea wide shif Unilaeal ax shif lage couny Unilaeal shif small couny Sensiiviy analysis 3

14 4 4 ( ( ( ( h h h h h h L hc C L C U log log ( ω ϑ κ = ( ( K LS W W K k K k F F G F G K C c J K J K T W W w L K p i B e isk B B B e B B I p I p C p L C U V Max ( ( ( P ( (( (. ( ( ( ( ( ( ( = = = = = Ε Ε Ε = Ε δ β ζ λ δ ξ β λ γ δ β λ β ouseholds:. Ricadian households - lendes Peiod uiliy funcion sepaable in C leisue and housing sevices Ricadian hh hold govenmen bonds and bonds issued by domesic and foeign hh eal capial of T and NT seco

15 5 5 (3a ( ( I K J K J u J I = γ γ (3b ( ( I J J u J I = γ γ (4 ( ( hc C hc C = Ε β Invesmen decisions w.. physical capial and housing ae subec o convex adusmen coss FOCs: Consumpion ule

16 ouseholds: 3. Liquidiy-consained households Consume enie disposable income (3 ( P C = ( W L TR T c c l w l l LS l Wage seing Tade union maximises a oin uiliy funcion (disibued equally populaion weighs s i Wage ule : 4 s c U s c L c U c c l l s U L s U L s U c s l U l c = ( ( W C W P C η W Wage mak up: (5 W η / θ γ W / θ β ( π ( sfw π W ( π ( sfw π sfw [ ] = W 6

17 Effec value added ax on capial fomaion: Invesmen is deemined by fims equaing he maginal poduc of capial (MPK o he enal ae (o use cos (UCC of capial ( MPK = UCC The use cos of capial mus be equal o he eal ae of inees on a safe asse he ae of depeciaion and possibly a isk pemium (isk ( UCC = δ isk Equaion ( and ( deemine a demand schedule fo capial as a funcion of he eal inees ae. 7

18 Effec on supply of capial (savings: ouseholds equae he maginal uiliy of cuen consumpion U c wih he maginal uiliy of fuue consumpion U c (discoun ae ρ and he elaive pice of consumpion oday vesus consumpion omoow which is he (goss eal inees ae muliplied wih he aio of value added ax faco (v and (v U C ( v = C ρ ( v Seady sae: eal inees ae = ae of ime pefeence (iespecive of he level of he consumpion ax. In he long un value added axes do no diso capial fomaion. Sho un: An incease in value added axes lowes eal consumpion fom all souces of income while a educion of labou axes inceases consumpion. (a pioi undeemined U 8

19 Effec on employmen: The souce of he posiive employmen (GDP effec is due o he shifed fom wages o income fom financial wealh. Conside labou supply equaion (simplified: whee σ denoes he elasiciy of labou supply (L and ω pefeence fo leisue Labou supply (as a shae of populaion of woking age depends posiively on he eal ne consumpion wage W C and negaively on household wealh (popoional o pivae consumpion C. Wages espond posiively o labou axes value added axes employmen and wealh C L = ω W C W P = ( ( v w σ / σ ω / σ ( C L W C = W P ( ( w v 9

20 Effec on employmen: The labou supply/wage esponse depends on he elaive size of w and v. As long as ( w ( v old old ( w ( v a posiive labou supply esponse can be expeced. Base effecs ae impoan. If w falls by he facion ( w ( v new new < fo any pecenage poin incease in v employmen effec is posiive. new new

21 EA wide ax shif: effecs Gemany GDP Employmen Consumpion Consumpion LC Consumpion NLC Invesmen Expos Impos Real wage coss Ne eal consumpion wage Real cons. inees income Consume pice level Tems of ade Dolla exchange ae

22 EA wide ax shif: effecs Gemany Nominal inees aes (pp Real inees aes (pp Inflaion (pp Tax ae labou (pp Tax ae consumpion (pp Bil. ade bal. vs. EA (% of GDP Tade balance (% of GDP

23 EA wide ax shif GDP Consumpion Invesmen Employmen Real w age coss Ne eal consumpion w age GDP Expos Impos Tax ae labou (pp Tax ae consumpion (pp 3

24 Gemany alone ax shif: effecs Gemany GDP Employmen Consumpion Consumpion LC Consumpion NLC Invesmen Expos Impos Real wage coss Ne eal consumpion wage Real cons. inees income Consume pice level Tems of ade Dolla exchange ae

25 Gemany alone ax shif: effecs Gemany Nominal inees aes (pp Real inees aes (pp.7.3 Inflaion (pp Tax ae labou (pp Tax ae consumpion (pp Bil. ade bal. vs. EA (% of GDP - -. Tade balance (% of GDP

26 Tax shif lage couny: Gemany GDP Consumpion Invesmen Employmen Real wage coss Ne eal consumpion wage GDP Expos Impos Tax ae labou (pp Tax ae consumpion (pp 6

27 Gemany alone ax shif: spillove GDP Employmen - - Consumpion Consumpion LC Consumpion NLC.. Invesmen Expos Impos Real wage coss Ne eal consumpion wage Real cons. inees income Consume pice level Tems of ade Dolla exchange ae

28 Gemany alone ax shif: spillove Nominal inees aes (pp Real inees aes (pp Inflaion (pp Tax ae labou (pp - Tax ae consumpion (pp Bil. ade bal. vs. DE (% of GDP Tade balance (% of GDP - 8

29 Unilaeal ax shif: spillove Spill-oves negaive bu small Demand effec - Pice effec Depends on elaive senghs of hese wo opposing effecs (elasiciy of subsiuion home-foeign goods Tax shif couny A : Lowe expo pices - lowe eal wage coss Spillove couny B: fall in eal wages lowe consumpion lowe domesic demand 9

30 Acing unilaeally vs. coodinaed GDP DE only GDP EA shif Employmen DE only Employmen EA shif Long un effecs lage unde coodinaed policy shif 3

31 Sensiiviy analysis Employmen GDP Real wages Real ne cons. wage afe yeas afe yeas afe 3 yeas afe 3 yeas Base case (DE ighe labou supply elasiciy (= No compensaion of ansfe ecipiens ighe pice elasiciy of aded goods (=

32 Summay and conclusion Shifing axaion fom labou o consumpion one poenial elemen o incease employmen and gowh. Quaniaive effecs likely o be modes. Equiy issues need o be addessed. Tax shif no subsiue fo sucual efom. Inceasing he efficiency of ax sysems should ely on a boad ange of measues. 3

33 Issues fo discussion Do you agee wih he economic analysis of he ax shif fom labou o consumpion as pesened o do you have a diffeen view o would like o emphasize addiional aspecs? Do you have any own evidence o quaniaive simulaion esuls on ax shifing fom labou o consumpion in Ialy? ow do you evaluae he opion of shifing he ax buden fom labou o consumpion elaive o shifing fom labou o ohe alenaive ax bases (o popey inheiances envionmenal axes ec.? 33

MEASURING THE DEADWEIGHT LOSS FROM TAXATION IN A SMALL OPEN ECONOMY

MEASURING THE DEADWEIGHT LOSS FROM TAXATION IN A SMALL OPEN ECONOMY A geneal mehod ih an applicaion o Seden By Pee Bich Søensen Depamen of Economics Univesiy of Copenhagen EPRU and CESifo MOTIVATION The