Working Paper: NBER ID: w17913
Authors: Ruud de Mooij; Michael Keen
Abstract: This paper focuses on two core tax design issues that arise in addressing current fiscal challenges It first explores the idea, prominent in troubled Eurozone countries, of a 'fiscal devaluation:' shifting from social contributions to the VAT as a way to mimic a nominal devaluation. Empirical evidence is presented which suggests that in Eurozone countries this may indeed improve the trade balance quite sizably in the short-run, though, as theory predicts, the effects eventually disappear. The paper then assesses the wider scope for VAT reform in meeting fiscal consolidation needs, developing and beginning to apply a methodology for finding additional VAT revenue in ways less distortionary and fairer than further raising the standard rate.
Keywords: Fiscal Devaluation; VAT; Fiscal Consolidation; Trade Balance
JEL Codes: F32; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal devaluation (shifting from social contributions to VAT) (H29) | trade balance (F14) |
| Reducing social contributions (SCR) (H69) | lowers labor costs (J39) |
| lowers labor costs (J39) | increases employment (J68) |
| increases employment (J68) | enhances international competitiveness (F23) |
| enhances international competitiveness (F23) | favorable trade balance (F14) |
| VAT reform (H25) | additional revenue (H27) |
| VAT reform (H25) | strengthen fiscal position (E62) |
| Fiscal devaluation (F31) | employment (J68) |
| Fiscal devaluation (F31) | trade outcomes (F10) |
| Effectiveness of fiscal devaluation is contingent upon nominal wage rigidity and exchange rate stability (H31) | effectiveness of fiscal devaluation (H31) |