Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyzes the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rise in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and if equilibrium forces on the labour market are strong. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value-added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.JEL codes: D58; H25; J64.

Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium

“…In the long run, output remains about 5% above the benchmark after a 13.2%-points capital tax rate cut. This increase is substantial, and larger than in a recent study by Bettendorf, Horst, and De Mooij (2009). It is smaller, however, than the strong effects reported by e.g., Arnold et al (2011).…”

Corporate tax harmonization in the EU

“…They acknowledge that this is probably not the best description of European labour markets. However, with imperfectly competitive labour markets, policies that reduce user cost of capital help to reduce unemployment (see Bettendorf et al, 2009a). Since the authors find that the CCCTB proposals reduce the user cost of capital, this could imply that the welfare effects of the tax reform are underestimated when one would allow for imperfectly competitive labour markets.…”

“…This is an unrealistic description of European labour markets, which are characterized by equilibrium unemployment. Bettendorf et al (2009a) explore how labour market imperfections modify the impact of corporate tax changes on the economy via its effect on structural unemployment. They find that the cost of capital is an important determinant of the equilibrium unemployment rate.…”

“…CORTAX is heavily inspired by the OECDTAX model of Sørensen (2001Sørensen ( , 2004a). An earlier version was used for European tax policy analysis in Bettendorf et al (2006Bettendorf et al ( , 2009a, Van der Horst et al (2007) and De Mooij and Devereux (2009). A detailed description of the structure and parameterization of the model can be found in Bettendorf and Van der Horst (2008).…”

The Unemployment Puzzle of Corporate Taxation

“…Bettendorf, van der Horst, and de Mooij (2009) use an applied general equilibrium model that is calibrated for the European Union. They find that corporate taxes raise unemployment.…”