Current publications

Cover of EconPol Policy Brief 39

What Is the Substance‐Based Carve‐Out under Pillar 2? And How Will It Affect Tax Competition?

Michael P. Devereux, Martin Simmler, John Vella and Heydon Wardell‐Burrus

On 8 October 2021 Secretary of the Treasury Janet L. Yellen claimed that: “As of this morning, virtually the entire global economy has decided to end the race to the bot-tom on corporate taxation.” Tax competition threatens the long‐term viability of the existing international corporate tax system and bringing it to an end would thus be a veritable game‐changer. But is Secretary Yellen correct? Will the OECD/G20 Inclu-sive Framework’s “Two Pillar Solution” that has now been agreed by 137 jurisdic-tions, in particular the global minimum tax found in Pillar 2, bring competition in corporate taxation to an end? This note examines one of the factors that will deter-mine the impact of Pillar 2 on tax competition: the design of the substance‐based carve‐out.

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Cover of EconPol Policy Report 32

Fiscal Policies during the Covid-19 Crisis in Austria - A Macroeconomic Assessment

Klaus Weyerstrass (EconPol Europe & IHS Vienna)

This EconPol Policy Report assesses the macroeconomic impact of fiscal policy measures introduced by the Austrian government during the Covid-19 crisis in 2020 and 2021. Large parts of the stimulus package aimed at stabilizing companies, employment and private households. According to the study short-term work schemes were particularly successful. Equally effective were measures supporting companies and the self-employed who were directly affected by the containment measures, e.g. liquidity support (fixed cost subsidies and loss compensations), tax reductions and tax deferrals. While support to private consumption generally is not the recommended fiscal policy reaction to a recession which is caused by government measures to restrict consumption possibilities, support to companies, employees and the self-employed who are affected by the closure of some businesses are appropriate, according to the study. At the same time, those companies that would have left the market anyway should not kept alive articifially, as this would hamper structural change. For the same reason, short-time work schemes should only be offered as long as the contaiment measures or other pandemic-related problems such as supply-chain disruptions prevail.

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Cover of EconPol Working Paper 71

Read My Lips? Taxes and Elections

Clemens Fuest, Klaus Gründler, Niklas Potrafke, and Fabian Ruthardt

The paper introduces a new dataset that includes quantitative harmonized indices of tax reforms, which provides indicators on tax reforms for tax rates and tax bases, along with detailed subindices for six types of taxes in in 23 industrialized and emerging economies between 1960 and 2014. Relating tax reforms to the timing of elections, we examine electoral cycles in tax reforms. Our results show that politicians postpone tax rate increases to after elections. A key innovation of our dataset is the coverage of harmonized indices for six tax types. Examining heterogeneity across tax types, we find that electoral cycles are particularly pronounced for value added tax rates and personal income tax rates.

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Cover of EconPol Opinion

Fiscal Rules Post-COVID: Using the Recovery Phase to Reduce Debt Ratios

Francesco Corti (CEPS) and Daniel Gros (CEPS)

The Commission has recently launched a review of the economic governance rules. One reason for this (re-)launch is that it is widely assumed that the debt reduction criterion cannot and should not be enforced when the suspension of the fiscal rules motivated by the Covid crisis ends. The main reason given is that debt levels have increased and that this makes it more difficult to reach the debt reduction target, which is one twentieth of the difference between the actual and the 60% reference value. However, this argument is wrong. The debt reduction criterion becomes easier to achieve during the post-Covid recovery phase because nominal GDP growth is higher than before the crisis, thus reducing the primary surplus required to achieve any given reduction in the debt to GDP ratio.

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Cover of EconPol Working Paper 70

Labour Market Power and the Quest for an Optimal Minimum Wage: Evidence from Italy

Mauro Caselli, Jasmine Mondolo and Stefano Schiavo

This paper investigates the recent trends in labor market power in Italy and assesses the impact of a potential minimum wage using a large sample of manufacturing firms. The authors show that, despite a general shift of labor market power from the employer to the workers, monopsony power is still widespread, especially in certain sectors and regions. The introduction of a minimum wage would be beneficial to the economy as it reduces the monopsony power of highly productive firms that pay low wages. However, it may also have a negative impact, since firms with low labor productivity may react by reducing the number of their employees or even by exiting the market. The optimal minimum wage, which minimizes the negative effects and maximizes the positive effects on the economy, ranges between EUR 8.25 and 9.65 per hour.

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Cover of EconPol Policy Brief 38

High Public Debt in an Uncertain World: Post-Covid-19 Dangers for Public Finance

Daniel Gros (EconPol Europe, CEPS)

In this EconPol Policy Brief Daniel Gros cautions countries with high debt ratios not to simply rely on low interest rates to make their (Covid-19) debt sustainable. Now that the health emergency is subsiding, governments have to chart a new course for public finance. The starting point is a higher level of public debt. However, high debt ratios represent a danger, even when interest rates are low. The key reason is increased uncertainty of growth prospects in a post-Covid-19 economy, coupled with an uncertainty regarding the probability of future large shocks. A prudent policy would therefore be to start reducing debt levels to pre-crisis levels as soon as the economy normalizes, according to the author.

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Cover of EconPol Working Paper 69

60%, -4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments

António Afonso and José Carlos Coelho (EconPol Europe, ISEG - Lisbon School of Economics & Management, Universidade de Lisboa; REM/UECE)

This paper investigates the relationship between the budget balance and the current account balance for European Union countries with a quarterly data set from 1995 to 2020, using various time series and panel data empirical methodologies. The analysis shows that the impact of the budget balance on the current account balance is greater for those Eurozone countries with an average current account balance-to-GDP ratio outside the range of -4 to 6%, and in Eurozone countries with debt-to-GDP ratios above 60%. Hence, from a policy perspective, to avoid such unwelcome effects on the current account balance, governments should try to contain both, budget deficits and big current account deficits. Economic policy measures to mitigate the resulting macroeconomic imbalances should be tailored to individual countries but - given the feedback effects between economies as a whole - they also require coordination at EU level.  

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Cover of EconPol Policy Brief 37

All for One and One for Green Energy: Community Renewable Investments in Europe

Valeriya Azarova (ifo Institute), Jed Cohen (Salt River Project Integrated System Planning and Support), Andrea Kollmann (Johannes Kepler University), Johannes Reichl (Johannes Kepler University)

Community renewable energy (CRE) projects are gaining momentum in Europe and could play a significant role in reaching the EU’s accelerated decarbonisation goals. This is a key message that can be derived from this EconPol Policy Brief. Based on a survey across 31 European countries the authors find a high interest in community renewable investments, especially in countries where this model is not yet very common. However, the design of the project matters. The study finds that certain attributes lead to higher incentives for citizen investment. One decisive attribute is the form of the administrative entity. Most respondents prefer CREs to be run by a local cooperative rather than by a utility company. Another important finding of the survey is that the belief in economic benefits of renewable energy projects is a more important driver for citizen investment than the belief in general environmental benefits. Hence, if project developers and policymakers tailor CRE projects and campaigns according to local interests, this could lead to a significant increase in the uptake of CRE schemes throughout Europe.

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Cover of EconPol Working Paper 68

Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: The EMU Experience of Portugal

António Afonso and José Carlos Coelho (EconPol Europe, ISEG - Lisbon School of Economics & Management, Universidade de Lisboa; REM/UECE)

This Working Papaer analyses the relation between Portugal’s government budget balance and current account balance from 1999 (Q1) – when Portugal joined the Euro – until 2019 (Q4). The study arrives at three main conclusions: First, a tightening of fiscal policy improves the external balance of the Portuguese economy, although not substantially. Second, the share of public consumption on GDP has a negative impact on the current account balance. This means, that any policy that stimulates economic activity leading to an increase in public consumption needs to be applied carefully. Finally, the research shows that the investment rate negatively affects the cyclical component of the current account balance, suggesting a high degree of integration of the Portuguese economy in international financial markets. Even though public policy measures promoting investment have a negative impact on external accounts in the short-term, they contribute to the structural improvement of the government balance in the long-run.

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Cover of EconPol Working Paper 67

European Structural Funds and Resilient and Recovery Facility Governance

Carlos San Juan Mesonada (EconPol Europe, Universidad Carlos III Jean Monnet Chair and the UC3M Economics Institute), Carlos Sunyer Manteiga (EconPol Europe, Universidad Carlos III de Madrid)

The implementation of recovery funds under the EU’s Covid-19 recovery program NextGenerationEU should be aligned with business cycle phases. This could ensure that financial support will have the most even and efficient impact across regions. This is one of the key conclusions derived from this EconPol Working Paper. The study analyzed the impact of the European Structural and Investment Funds on regional development over the period 1986–2018, identifying lessons for the EU's Covid recovery program NGEU. The study finds that European Structural and Investment Funds distributed between 1986 and 2018 had a positive impact overall on regional growth in the recipient regions: In the long run, an increase of 1% in the EU aid led to permanent increases of personal income around 0.03% - 0.04%. However, the research shows that the business cycle affects the speed of convergence of the regions. The funds were least effective during downturn phases, especially in the least developed regions. This effect can partially be attributed to lower absorption rates in these regions and liquidity traps. According to the research, one way to mitigate this effect is to ease co-financing requirements during economic downturn phases and to adapt funds to the business cycle phase.

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