Does climate policy make the EU economy more resilient to oil price rises? A CGE analysis

The European Union has committed itself to reduce greenhouse gas (GHG) emissions by 20% in 2020 compared with 1990 levels. This paper investigates whether this policy has an additional benefit in terms of economic resilience by protecting the EU from the macroeconomic consequences due to an oil price rise. We use the GEM-E3 computable general equilibrium model to analyze the results of three scenarios. The first one refers to the impact of an increase in the oil price. The second scenario analyses the European climate policy and the third scenario analyses the oil price rise when the European climate policy is implemented. Unilateral EU climate policy imposes a cost on the EU of around 1.0% of GDP. An oil price rise in the presence of EU climate policy does impose an additional cost on the EU of 1.5% of GDP, but this is less than the 2.2% of GDP that the EU would lose from the oil price rise in the absence of climate policy. This is evidence that even unilateral climate policy does offer some economic protection for the EU.JRC.J.1-Economics of Climate Change, Energy and Transpor

CORTAX 2019 Updated calibration and baseline results - JRC Working Papers on Taxation and Structural Reforms No 07/2023

CORTAX is a macroeconomic model that focuses on corporate taxation and is used extensively for European Commission policy assessments. As a macroeconomic model, it simulates variables such as GDP, investment and employment, while being especially notable for its focus on corporate income taxation (CIT). It models the key aspects of CIT, such as multinational profit shifting, investment decisions, loss compensation, and debt-equity financing. CORTAX is versatile and can be used to examine different aspects of CIT, such as adjusting or harmonizing the CIT rate or base, addressing debt bias in CIT, and consolidation of the multinational CIT base. CORTAX is a multi-country model, covering all EU Member States, selected partner countries, and a tax haven. The general equilibrium framework of the model captures the interactions between different economic actors, including those between multinational headquarters and foreign subsidiaries. This calibration updates the model to 2019. This paper outlines the model structure, and explains the methodology used to arrive at the new baseline, including explaining the choices of data sources and parameters. The paper provides key summary results that serve as both a description and a validation of the model, and also serves as a reference for future work carried out using CORTAX 2019.JRC.B.2 - Fiscal Policy Analysi

The Macroeconomic Impact of the Energy and Climate Provisions of the US Inflation Reduction Act: Evidence for the EU

We assess the extent to which the $391bn of energy and climate tax provisions under the Inflation Reduction Act in the United States could lead to a potential reallocation of investment and production activities away from the European Union. The analysis is based on the JRC’s CORTAX multi-country, general equilibrium model in order to provide estimates of the potential impact of the IRA on main macroeconomic aggregates for the EU as a whole and the US. Our results suggest that, if the US had adopted the subsidies scheme unilaterally, the IRA provisions would have boosted investment in this country at the expense of investment in the EU. However, taking in to account available funding from various EU programmes that are planned under the current Multiannual Financial Framework and NextGenerationEU (e.g. from the Recovery and Resilience Facility), the simulation results suggest that EU green sectors would significantly increase their activity while the positive impact on the EU economy as a whole would be positive and noticeable.JRC.B.2 - Fiscal Policy Analysi

Economic Effects of Simplified Procedures for Claiming Cross-Border Tax Reliefs

We examine the effect of compliance frictions in reclaiming foreign withholding taxes on Foreign Portfolio Investments (FPI) using a comprehensive panel of FPI stocks of 83 countries, including EU Member States, between 2005 and 2019 and country-pair-specific withholding tax rates. We find a negative and statistically significant elasticity of the FPI stock of equity and debt holdings to non-refundable withholding taxes. The estimated elasticities imply that a 10 percentage point reduction in non-refundable withholding taxes increases the FPI stock of equity holdings by 8.2%. In a second step, we employ a general equilibrium model to quantify the macroeconomic implications of compliance frictions. In absence of costs in the withholding tax reclaim process, average GDP in the EU27 countries would increase by 0.10%, capital and wages would rise by 0.21% and 0.06%, respectively, suggesting noticeable macroeconomic costs arising from such compliance frictions.JRC.B.2 - Fiscal Policy Analysi

Equal Focus on Inequality? Approaches to Distributional Impact Assessment in the National Budget Process Across the EU

AbstractAfter four decades of increasing within‐country income inequality in many EU Member States, this study first aims to understand to what extent and how EU Member States make use of distributional impact assessments (DIAs) for budgetary measures. The second aim is to understand the factors that constrain the use of DIA, leading us to propose strategies for how it could be used more widely. To these ends, we perform a desk‐based study of the documents produced in the national budgeting process, which is then followed up with structured key informant interviews with those responsible for producing key budgetary documents in each of the 27 Member States of the EU. We then detail the constraints to performing more DIAs and potential solutions involving actions at both the country and EU levels. This study constitutes the first comprehensive analysis of DIA practices across the EU

The impact of the global minimum tax on corporate tax revenues: evidence for EU Member States

Most Member States have already transposed the EU Minimum Corporate Tax Directive that implements the so-called "Pillar Two" of the global agreement to address the tax challenges arising from the digitalisation of the economy. The Directive ensures a 15% global minimum level of taxation of for multinational enterprise groups and large-scale domestic groups in the Union that have an effective tax rate below 15%. The new top-up tax is expected to reduce profit shifting. While previous estimates have been produced by the IMF, OECD and EU Tax observatory, we bring complementary evidence by considering also the long-term and economy-wide impact of Pillar Two for the EU. Our empirical estimates, based on the 2017-2021 country-by-country reporting (CbCR) data collected by the OECD, suggest that Corporate Income Tax (CIT) revenues in the EU would increase on average by 7.1% or EUR 26 billion annually from the implementation of the Global Minimum Tax Rules by all EU countries in the short run. These calculations take into account the recent policy developments in the US concerning the opt-out from the Pillar Two agreement. Our long-term fiscal projections, once the impact of Pillar Two implementation on business investment is factored in, indicate that CIT revenues would increase annually by 7.0% (EUR 25.7 billion) for the EU as a whole.JRC.B.2 - Fiscal Policy Analysi

Taxing income or consumption: macroeconomic and distributional effects for Italy

We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects notwithstanding the revenue-compensating increase in consumptions taxes.JRC.B.2 - Fiscal Policy Analysi

Micro-founded tax policy effects in a heterogenenous-agent macro-model

Microsimulation models are increasingly used to calibrate macro models for tax policy analysis. Yet, their potential remains underexploited, especially in order to represent the non-linearity of the tax and social benefit system and interactions between capital and labour incomes which play a key role to understand behavioural effects. Following DeBacker et al. (2018b) we use a microsimulation model to provide the output with which to estimate the parameters of bivariate non-linear tax functions in a macro model. In doing so we make marginal and average tax rates bivariate functions of capital income and labour income. We estimate the parameters of tax functions in order to capture the most important non-linearities of the actual tax schedule, together with interaction effects between labour and capital incomes. To illustrate the methodology, we simulate a reduction in marginal personal income tax rates in Italy with a microsimulation model, translating the microsimulation results into the shock for a dynamic overlapping generations model. Our results show that this policy change affects differently households distinguished by age and ability type.JRC.B.2 - Fiscal Policy Analysi

EDGE-M3: A Dynamic General Equilibrium Micro-Macro Model for the EU Member States

This paper provides a technical description of the overlapping generations model used by the Joint Research Centre to analyse tax policy reforms, including in particular pension and demographic issues. The main feature of the EDGE-M3 model lies in its high level of disaggregation and the close connection between microeconomic and macroeconomic mechanisms which makes it a very suitable model to analyse the redistributive impact of policies. EDGE-M3 features eighty generations and seven earnings-ability types of individuals. To facilitate a realistic dynamic population structure EDGE-M3 includes Eurostat's demographic projections. In terms of calibration, the EDGE-M3 family of overlapping generations models is heavily calibrated on microeconomic data. This allows the introduction of the underlying individuals' characteristics in a macro model to the greatest extent possible. In particular, it includes the richness of the tax code by means of income tax and social insurance contribution rate functions estimated using data from the EUROMOD microsimulation model. This feature allows in particular a close connection between the macro and the micro model. In addition, the earnings profiles of the seven heterogeneous agent types are estimated using survey data. Finally, the labour supply, bequests and consumption tax calibration are all done using detailed microeconomic data, making the model highly suitable for the analysis of intra- and intergenerational analysis of tax policy.JRC.B.2 - Fiscal Policy Analysi