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LABOR TAX REDUCTIONS IN EUROPE: THE ROLE OF PROPERTY TAXATION

Published online by Cambridge University Press:  18 June 2020

Marcin Bielecki  and
Nikolai Stähler
Marcin Bielecki
Affiliation:
Narodowy Bank Polski, Swietokrzyska 11/21, 00-919 Warsaw, Poland
Nikolai Stähler*
Affiliation:
Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany
*
Address correspondence to: Nikolai Stähler, Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany. e-mail: nikolai.staehler@bundesbank.de.
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Abstract

We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.

Keywords

Search Frictions in Housing MarketsProperty TaxationTax ReformGeneral Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 2 , March 2022 , pp. 419 - 451
Copyright
© Cambridge University Press 2020

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Footnotes

The paper represents the authors’ personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank, the Narodowy Bank Polski, the Eurosystem or its staff. Any errors are ours. We would like to thank our anonymous Bundesbank research paper referee, two anonymous journal referees, participants at the 2018 Theories and Methods in Macroeconomic conference in Paris as well as the 2019 EEA/ESEM Meeting in Manchester and seminar participant at Bundesbank and Narodowy Bank Polski as well as Andreas Gulyas for helpful comments.

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