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Publication
Measuring the impacts of personal and corporate income tax cuts on a small island open economy
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Advisor(s)
Abstract(s)
In 1999, subsequent to a legislative review, the authorities of the Azores, an autonomous region of Portugal, decided to reduce income tax rates applicable locally by 30% in the case of corporate income and by 20% in the case of personal income. There was no debt or transfer compensation for this tax reduction, meaning that the regional budget was reduced by the equivalent amount of the tax reduction. The current paper analyses the impact of such a shock on various macro and micro variables pertaining to the Azorean economy, including social welfare, using a dynamic CGE model comprising forty five sectors, six household groups, three government levels and four trading partners. It is concluded that the short run impact on GDP is, as expected, negative, given that the marginal propensity to save of the private sector is positive and there was no compensating policy. There is an initial increase in unemployment due to the cut in government expenditures. In the long run, however, the impact becomes positive due to increased investment and private consumption. The stronger effect comes from the reduction in personal income taxes, a much greater proportion of all taxes collected in the region. Real wages net of personal income taxes rise as does the labour supply. The impact of the policy is shown to be positive for all household income groups, as evaluated through equivalent variation. The lowest income group ends up benefiting the most, in relative terms.
Description
Keywords
Economia Social Rendimento Local Taxa de Imposto Local Income Social Economy Tax Rate Azores
Citation
Bayar, Ali; Fortuna, Mário; Mohora, Cristina; Opese, Masudi; Sisik, Suat (2009). Measuring the impacts of personal and corporate income tax cuts on a small island open economy, “Working Paper Series”, 4, 58 pp.. Ponta Delgada: Universidade dos Açores, CEEAplA-A.