This paper provides a microeconometric analysis of labour force participation elasticities in Slovakia where we study the elasticity with respect to a unique tax reform whereby the flat tax was backtracked and replaced by a progressive tax. By estimating a probability model for labour force participation, we show that the low-skilled and females are groups that are particularly responsive to changes in income taxes and transfers. We perform a microsimulation analysis of two scenarios of flat-tax regime abolishment. We find that the recent departure from the flat-tax system in Slovakia in 2013, which introduced two tax brackets in personal income taxation, only negligibly reduced the average probability of being economically active at the extensive margin. A more significant average effect has been found in a hypothetical scenario with a similar fiscal revenue impact, simulating a departure from the flat-tax system by reintroducing five tax brackets. We show the different impacts of the two distinct scenarios of abolishing the flat tax on selected subgroups of the population. JEL Classification: H31, H53, I38, J21

The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.

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In this paper, we present a framework and perform an assessment of different fiscal consolidation strategies both on the revenue as well as on the expenditure sides of the budget in the context of Slovakia. The model we use for simulations is a behavioural general-equilibrium what-if model. We analyse the simulated impacts of consolidation strategies on growth and on fiscal balance (both in short-and long-term). The microsimulation approach allows us also to evaluate the distributional impacts. In addition, the approach permits to compare the statutory with the resulting tax incidence in the long-run. We simulate strategies based on taxing labour income, taxing consumption as well as cutting expenditures on social transfers. We document that corporate and labour taxes are more unfavourable to output growth, while consumption taxes belong to less