EconPol Working Paper Series

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 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 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 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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