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23 May 2008

Tax/Benefit Policies and Growth Potential of the EU

Kari E.O. Alho

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European Network of Economic Policy Research Institutes (ENEPRI) Research Report No. 55  / 88 pages

The EU has ambitious goals for economic performance. The goals are to be reached in combination with social cohesion and environmentally sustainable development. The main economic policy instruments to be used by the EU member states are taxes and benefits. The economic and political framework for implementing measures in these areas is currently delineated, and is both encouraged and constrained by factors such as population ageing, globalisation and more intense international competition in tax and social policies.
The aim of the project “Tax/benefit systems and growth potential of the EU − TAXBEN” (SCS8-CT-2004-502639), as outlined in SSP Priority 8, Topic 3.1, Task 4, was to carry out an in-depth analysis of tax/benefit policies in five broad areas in which these policies play a crucial role with respect to EU goals. These areas are employment, corporate taxes subject to tax competition, productivity growth and convergence, macroeconomic policies under a single monetary policy, and the environment and climate change. The project was carried out by seven European economic policy research institutes of the ENEPRI network.
The project team used many novel approaches, especially in building new tools that rely on general equilibrium models, so that both the direct and indirect effects of taxation could be analysed. New applications of existing large-scale multi-country models were also used to evaluate the impact of tax policies. In addition, recourse was taken to econometric estimation of the relationships between key economic target variables, on the one hand, and tax/benefit (and other fiscal policies) and labour market indicators, on the other, using large international datasets. A number of theoretical approaches were taken in relation to economic policies under the single currency. The analysis covered the EU-15 countries, the new member states and in some cases other OECD countries, while some research efforts considered a global approach to policy-making. Altogether, the project’s output was 24 working papers for the 5 work packages and 5 seminars in addition to the final conference. The project delivered a large number of research insights on actual behaviour related to tax/benefit systems and reached conclusions that should be taken into account in policy-making and reforms to tax/benefit policies in the EU.