Labour Taxation and Employment: An Analysis with a Macroeconomic Model for the Finnish Economy
In this study, we scrutinize the effect of labour taxation on employment and growth. We also analyze the effect of other fiscal policy instruments, e.g. the effect of public spending. In this context, our special interest is in the fiscal policy simulations that are neutralized for the government budget. The analysis will be performed with a macroeconomic model (EMMA) developed at the Labour Institute for Economic Research. The study finds that a one percentage point decrease in the income tax rate which is financed by increasing government debt improves GDP by 0.58 and employment by 0.25 per cent in the long run. Also, a one percentage point decrease in the income tax rate which is neutralized for the government budget by reducing public purchases produces a long-run increase in GDP and employment of a similar magnitude, even though its short-run effect on both variables is negative.
Keywords: Labour taxation, macro models, fiscal policy