## cr1778

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---

### Introduction and research question
- Focus: steady increase of current account surpluses in Germany, the Netherlands and Switzerland (’Surplus 3’ or S3) since the mid-1990s.
- Key questions:
  - Are there common drivers behind these trends or idiosyncratic developments?
  - Do rising current account surpluses in Germany, the Netherlands and Switzerland reflect beggar-thy-neighbor policies, strong foreign demand for their products, subdued domestic demand, or combinations thereof?
- Methodology: two-pronged strategy combining country-level analysis and summary statistics on current accounts, output gaps and real effective exchange rate (REER) developments using a simple graphical representation (Dornbusch framework). Emphasis is descriptive and positive.

### Stylized facts and overall context
- Collective S3 current account: close to 9 percent of GDP in 2015.
- S3 current account trends:
  - Increased steadily since the mid-1990s, with acceleration in the early 2000s.
  - Rise mainly reflected steady increases in the goods trade balance.
- European context:
  - Deficit countries (Greece, Ireland, Italy, Portugal and Spain—the EA5) experienced relative REER appreciation vs. surplus countries before the crisis; REER gap narrowed after the crisis.
  - Post-GFC, rebalancing occurred but remained incomplete; some surpluses increased further.
- Interpretation caveat: co-movements of REER, output and current accounts may reflect causality in either direction or common third factors; an identification strategy (graphical macroeconomic framework) is used to distinguish shocks.

### Identification framework (Dornbusch 1980 graphical approach)
- Three generic shocks and theoretical correlation patterns between CA, REER and output (Y):
  - Domestic demand shock:
    - Corr(CA; REER) < 0
    - Corr(CA; Y) <= 0
    - Corr(REER; Y) >= 0
  - Foreign demand shock:
    - Corr(CA; REER) > 0
    - Corr(CA; Y) > 0
    - Corr(REER; Y) > 0
  - Competitiveness shock:
    - Corr(CA; REER) < 0
    - Corr(CA; Y) > 0
    - Corr(REER; Y) < 0
- Mechanisms summarized:
  - Foreign demand increase → net-export schedule shifts right → positive correlations among Y*, CA and REER.
  - Domestic demand expansion → net saving schedule shifts right → higher output and induced REER appreciation.
  - Competitiveness deterioration → net-export schedule shifts left → lower income and downward pressure on inflation with partial REER appreciation offset.

### Empirical findings: pre- and post-GFC drivers
- Before the GFC (1999–2007):
  - Netherlands: primarily benefited from positive foreign demand shock; correlations of income, REER and CA are overall positive.
  - Germany and Switzerland: competitiveness gains (e.g., wage moderation in Germany) played an important role; negative correlations between changes in REER and CA/output gap.
  - Across Europe: divergent domestic demand cycles (EA5 bubble-like behavior) magnified imbalances.
- After the GFC:
  - S3 surpluses largely traceable to negative domestic demand shocks (domestic demand compression), partly mitigated by weak foreign demand and competitiveness losses.
  - Correlation patterns indicate domestic demand suppression in S3 countries more than offset declines in foreign demand.
  - Netherlands specific: negative correlations between CA and REER and between CA and Y, and a positive correlation of REER and Y, consistent with a negative domestic demand shock (e.g., double-dip recession due to a housing bust).

### The Netherlands: detailed findings and key statistics
- Current account evolution:
  - Average CA in the 1990s: 5 percent of GDP.
  - Record CA: 10.8 percent of GDP in the midst of the 2012 recession.
  - CA moderated to 8.7 percent in 2015 during the recovery.
  - Dutch CA ranks fourth in Europe behind Norway, Switzerland and Luxembourg; represents about 0.6 percent of aggregated euro area GDP.
- Competitiveness:
  - Strengthening of the CA occurred despite steady competitiveness losses, due to euro appreciation and rapidly catching up unit labor costs after 1990s wage moderation.
- Trade openness and composition:
  - Sum of exports and imports has averaged about 150 percent of GDP since 2010.
  - Goods exports composition (second half of the 2000s):
    - Machinery and equipment: about 30 percent of total exports
    - Chemical products: about 17 percent
    - Food products: about 11 percent
    - Natural gas: about 10 percent
  - Re-exports:
    - Represent about 45 percent of total exports
    - Explain about a quarter of the trade surplus
    - Increasingly account for the bulk of high value added goods (e.g., pharmaceutical products, office machinery)
  - Geographic pattern:
    - Largest share of Dutch trade surplus with European partners, including Germany
    - Large and increasing deficit with the rest of the world, notably China
  - Services balance: small and negative throughout the period despite substantial inward and outward flows of intellectual property and business services traded by multinationals
- Savings-investment balances and sectoral contributions:
  - NFC (non-financial corporate) sector accounts for the lion’s share of the savings-investment surplus.
  - NFC sector net lending-borrowing position:
    - Peaked at above 9 percent of GDP in 2012.
  - NFC net savings:
    - Reached about 20 percent of GDP in 2012.
  - Mechanisms and interpretations:
    - Multinationals: account for about 40 percent of total employment and two thirds of private turnover.
    - NFC net savings increase likely influenced by multinationals’ increased profitability and low profit distributions, shaped by favorable tax incentives.
    - Balance sheets of multinationals boosted by dividends and interest payments received from foreign subsidiaries, often exempt from domestic corporate income tax under equity holding and participation exemptions.
    - Exemption on capital gains tax has channeled net savings into share buybacks and equity asset purchases rather than dividend distribution, contributing to deleveraging.
    - National savings have been diverted away from domestic capital formation toward equity foreign direct investment.

### Country-level summary of drivers
- Netherlands:
  - Pre-GFC driver: supportive foreign demand.
  - Post-GFC driver: domestic demand compression via profit retention by multinationals, household deleveraging, increased mandatory and precautionary savings, and pro-cyclical fiscal policy.
- Germany and Switzerland:
  - Pre-GFC driver: competitiveness gains (Germany) and to a lesser extent Switzerland.
  - Post-GFC driver: domestic demand suppression large enough to offset competitiveness losses and weaker foreign demand.

### Box 1 — International Corporate Taxation Regime in The Netherlands (features)
- Main features:
  - The double ‘participation exemption’ (non-taxation of both dividends paid by foreign subsidiaries and capital gains on disposal of foreign equity).
  - Low withholding tax rates on interests, royalties and service fees to foreign subsidiaries, including those located in non-EU countries, complemented by a comprehensive double taxation treaty (DTT) network.
  - Advanced tax rulings and pricing agreements, bilaterally negotiated with the Ministry of Finance and kept confidential, even vis-à-vis the Parliament.
  - A special regime for holdings, providing low taxes on interest received from loans to foreign subsidiaries.
- Additional fiscal incentives:
  - Subsidies available to Dutch firms, such as on innovation activities (patent box).

### Annex I — Competitiveness, External and Internal Balances, 1999–2007 (key data and decomposition)
- REER-ULC decomposition concept:
  - REER-ULC = changes in real relative unit labor costs u/u* = [U/P]/[U*/P*] (labor-market based) + CPI based real effective exchange rates EP/P* (product-market based).
  - E, U* and P* are weighted indices of the 24 most important trading partners for each listed country.
  - A positive change in REER denotes appreciation.
- Table: Changes in CA, REER-ULC and the output gap 1999-2007, % change (columns preserved: REER-ULC (1)=(2)+(3) u/u* (2) EP/P* (3) Current account (4) Output gap (5))
  - Greece 16.9 9.5 7.5 -22.8 11.4
  - Spain 17.9 -0.6 18.5 -14.2 6.3
  - Ireland 24.6 2.5 22.2 -14.1 5.9
  - Belgium 4.9 -0.3 5.1 -5.6 2.3
  - Portugal 9.4 -2.7 12.1 -5.4 1.0
  - USA - 11.8 2.3 -14.1 -4.4 1.2
  - France 8.0 3.2 4.8 -4.1 2.4
  - Italy 15.9 5.4 10.5 -3.1 4.7
  - Finland 3.8 1.5 2.3 0.5 4.8
  - Netherlands 9.1 -1.4 10.4 5.3 1.0
  - Austria 1.2 -2.8 4.0 7.6 2.2
  - Switzerland -1.0 na -1.6 7.7 3.5
  - Germany -7.6 -4.5 -3.1 9.6 3.1
- Table: Changes in CA, REER-ULC and the output gap 2007-2016, % change
  - Finland 6.3 5.7 0.6 -3.9 -6.4
  - Belgium -0.4 -0.4 -0.1 -1.3 -2.7
  - France -2.0 2.9 -5.0 -0.9 -2.2
  - Austria 0.9 1.8 -0.9 -0.6 -3.3
  - USA 21.7 -1.0 22.8 1.7 -2.0
  - Italy -3.2 0.8 -3.9 3.6 -2.5
  - Germany 2.2 3.9 -1.8 4.0 -2.2
  - Netherlands -0.3 3.9 -4.3 4.2 -2.2
  - Switzerland 38.1 na 34.8 4.4 -4.0
  - Portugal -11.8 -9.9 -2.0 9.7 -0.8
  - Spain -12.1 -4.1 -8.1 11.7 -3.0
  - Greece -16.6 -5.4 -11.2 15.2 -7.0
  - Ireland -31.7 -18.1 -13.6 19.7 3.0

### Tax reform analysis for the Netherlands (GIMF simulations and main conclusions)
- Objective: quantify macroeconomic effects of budget neutral fiscal reforms that shift taxation away from labor towards property and consumption (VAT) using GIMF.
- Main conclusions:
  - Even a budget neutral shift away from labor can have sizable positive effects on growth and employment.
  - Fiscal policy in a currency union is particularly effective for a single economy because monetary policy responds to euro area wide developments, generating crowding-in rather than crowding-out effects when nominal rates are quasi-fixed.
  - Labor income tax (LIT) is highly distortionary: discourages labor supply, inflates product wages, and weighs on profits and investment. Shifting burden to less distortionary sources boosts labor supply, capital accumulation, and potential output.
  - Effects remain significant even under low labor supply elasticity.
- Model features and limitations:
  - GIMF: multi-country, multi-goods DSGE with forward-looking households and firms, tradable and non-tradable sectors, stock-flow consistency, sticky prices and wages, real adjustment costs, financial frictions, OLG, LIQ households (25 percent advanced economies), and fiscal instruments including VAT, CAPIT, LIT, employer and employee SSC, property tax.
  - Limitations: abstracts from detailed distributional issues and employment status heterogeneity; employment measured as total hours worked.

### GIMF implicit tax multipliers (1 Percent of GDP Permanent Fiscal Consolidation) — GDP effect, level % deviations
- FLSE = 0.5
  - Labor Income: T+1 -0.2, T+5 -0.4, T+10 -0.5, LT Max -0.7
  - Social security (employees): T+1 -0.2, T+5 -0.4, T+10 -0.5, LT Max -0.7
  - Social security (employers): T+1 -0.6, T+5 -0.4, T+10 -0.3, LT Max -1.2
  - Property: T+1 -0.2, T+5 0.8, T+10 0.5, LT Max 0.0
  - VAT: T+1 -0.2, T+5 -0.2, T+10 -0.3, LT Max -0.4
  - Excise: T+1 -0.2, T+5 -0.2, T+10 -0.2, LT Max -0.4
  - Capital income: T+1 -0.7, T+5 -0.4, T+10 -1.4, LT Max -1.4
- FLSE = 0.2
  - Labor Income: T+1 -0.7, T+5 -0.2, T+10 -0.2, LT Max -0.3
  - Social security (employees): T+1 -0.2, T+5 -0.2, T+10 -0.3, LT Max -0.3
  - Social security (employers): T+1 -0.5, T+5 -0.3, T+10 -0.3, LT Max -0.6
  - Property: T+1 -0.2, T+5 0.5, T+10 0.2, LT Max 0.0
  - VAT: T+1 -0.2, T+5 -0.1, T+10 -0.2, LT Max -0.2
  - Excise: T+1 -0.2, T+5 -0.1, T+10 -0.2, LT Max -0.2
  - Capital income: T+1 -0.7, T+5 -0.5, T+10 -1.7, LT Max -1.4

### Interpretation of multipliers and distributional effects
- CAPIT (capital income taxation) has the largest negative effect on employment and output, followed by SSC and LIT.
- Distortionary taxes affecting capital accumulation and labor supply have the largest long-term effects.
- SSC distinctions:
  - Employer SSC increases firms’ marginal costs, depresses profits, reduces factor demand (notably labor), lowers consumption and investment, depresses inflation and inflation expectations, raises real interest rates and feeds back negatively on LIQ consumption and output.
  - Employee SSC behaves more like LIT: higher SSC discourages labor supply (substitution effect), leading to relatively higher real wages, higher inflation and lower real interest rates than employer SSC case; LIQ consumption and investment are less affected.

### Growth-friendly, budget-neutral tax reform packages (TRP1–TRP4): design and outcomes
- Simulation conventions:
  - High elasticity case (FLSE = 0.5) reported; monetary policy rate assumed fixed for 3 years.
- TRP1: permanent drop in labor income taxation financed by an increase in VAT.
  - Assumption: permanent drop of 1.2 percent of GDP in labor income tax revenue offset by an increase in VAT revenues (corresponds to 8.1 billions from VAT unification).
  - Effects (high-level): modest employment gains; short-term domestic demand boost; slight sustained current account deterioration.
  - High labor supply elasticity outcome: Hours worked increase by almost 0.3 percent ≈ 17'000 FTE jobs.
- TRP2: permanent drop in labor income taxation financed by an increase in property taxes.
  - Effects: larger output and employment gains than TRP1.
  - Quantitative outcomes: Output increases by 0.9 percent in the long term (by year 2055); Employment increases by about 45,500 FTE jobs (long term).
  - Low elasticity case: about 21,500 FTE jobs by 2055, about half by 2025.
  - Trade/current account: REER depreciation boosts exports; trade balance improves transitorily and the current account improves permanently.
- TRP3 and TRP4: lowering employers’ and employees’ social security contributions (SSC) funded by VAT (TRP3) or property tax (TRP4)
  - Assumes reductions of SSC revenues by 0.6 percent of GDP each; compensated by increasing VAT/property tax revenues by 1.2 percent of GDP.
  - TRP4 yields the largest output and employment gains:
    - Employment increase of about 80'000 FTE (long term) under baseline FLSE.
    - Low elasticity case: about 40,000 FTE in the long term, about half by 2025.
  - Common dynamics: real wages increase, REER depreciates, but current account may deteriorate due to short-term consumption and investment increases.
- Comparative summary:
  - TRP1: modest employment gains; slight sustained current account deterioration.
  - TRP2: larger output and employment gains; REER depreciation; permanent current account improvement.
  - TRP3: SSC cuts compensated by VAT — real wages rise, REER depreciates, current account deteriorates.
  - TRP4: SSC cuts compensated by property tax — largest output and employment gains (about 80'000 FTE under baseline FLSE).

### Policy implications and recommendations
- Growth-friendly, budget-neutral tax reforms that shift the tax burden away from labor toward less distortionary bases can yield long-lasting positive effects on output and employment.
- Among examined options, dropping social security contributions in favor of higher property taxation would bring the largest benefits.
- Such reforms are particularly relevant for countries with scarce unused productive capacity and limited fiscal space.

*Prepared by Marc Gerard, Tryggvi Gudmundsson and Jean‑Marc Natal (all EUR).*

### References _____________________________________________________________________________ 18

### cr1778 - References _____________________________________________________________________________ 18

### Introduction and research question
- Focus: steady increase of current account surpluses in Germany, the Netherlands and Switzerland (’Surplus 3’ or S3) since the mid-1990s.
- Key questions:
  - Are there common drivers behind these trends or idiosyncratic developments?
  - Do rising current account surpluses in Germany, the Netherlands and Switzerland reflect beggar-thy-neighbor policies, strong foreign demand for their products, subdued domestic demand, or combinations thereof?
- Methodology: two-pronged strategy combining country-level analysis and summary statistics on current accounts, output gaps and real effective exchange rate (REER) developments using a simple graphical representation (Dornbusch framework). Emphasis is descriptive and positive.

### Stylized facts and overall context
- Collective S3 current account: close to 9 percent of GDP in 2015.
- S3 current account trends:
  - Increased steadily since the mid-1990s, with acceleration in the early 2000s.
  - Rise mainly reflected steady increases in the goods trade balance.
- European context:
  - Deficit countries (Greece, Ireland, Italy, Portugal and Spain—the EA5) experienced relative REER appreciation vs. surplus countries before the crisis; REER gap narrowed after the crisis.
  - Post-GFC, rebalancing occurred but remained incomplete; some surpluses increased further.
- Interpretation caveat: co-movements of REER, output and current accounts may reflect causality in either direction or common third factors; an identification strategy (graphical macroeconomic framework) is used to distinguish shocks.

### Identification framework (Dornbusch 1980 graphical approach)
- Three generic shocks identified and their theoretical correlation patterns between CA, REER and output (Y):
  - Domestic demand shock:
    - Corr(CA; REER) < 0
    - Corr(CA; Y) <= 0
    - Corr(REER; Y) >= 0
  - Foreign demand shock:
    - Corr(CA; REER) > 0
    - Corr(CA; Y) > 0
    - Corr(REER; Y) > 0
  - Competitiveness shock:
    - Corr(CA; REER) < 0
    - Corr(CA; Y) > 0
    - Corr(REER; Y) < 0
- Mechanism summary:
  - A foreign demand increase shifts the net-export schedule right → positive correlations between Y*, CA and REER.
  - A domestic demand expansion shifts net saving schedule right → higher output and induced REER appreciation, partially offsetting initial gain.
  - A competitiveness deterioration shifts net-export schedule left → lower income and a downward pressure on inflation, partially offsetting REER appreciation.

### Empirical findings: pre- and post-GFC drivers
- Before the GFC (1999–2007):
  - Netherlands: primarily benefited from positive foreign demand shock; correlations of income, REER and CA are overall positive.
  - Germany and Switzerland: competitiveness gains (e.g., wage moderation in Germany) played an important role; reflected in negative correlations between changes in REER and CA/output gap.
  - Across Europe: divergent domestic demand cycles (EA5 bubble-like behavior) magnified imbalances.
- After the GFC:
  - S3 surpluses largely traceable to negative domestic demand shocks (domestic demand compression), partly mitigated by weak foreign demand and competitiveness losses.
  - Correlation patterns indicate domestic demand suppression in S3 countries more than offset declines in foreign demand.
  - For the Netherlands specifically: negative correlations between CA and REER and between CA and Y, and a positive correlation of REER and Y, are consistent with a negative domestic demand shock (for example, a double-dip recession due to a housing bust).

### The Netherlands: detailed findings
- Current account evolution:
  - Average CA in the 1990s: 5 percent of GDP.
  - Record CA: 10.8 percent of GDP in the midst of the 2012 recession.
  - CA moderated to 8.7 percent in 2015 during the recovery.
  - Dutch CA ranks fourth in Europe behind Norway, Switzerland and Luxembourg; represents about 0.6 percent of aggregated euro area GDP.
- Competitiveness:
  - Strengthening of the CA occurred despite steady competitiveness losses, due to euro appreciation and rapidly catching up unit labor costs after 1990s wage moderation.
- Trade openness and composition:
  - Sum of exports and imports has averaged about 150 percent of GDP since 2010.
  - Goods exports composition (second half of the 2000s):
    - Machinery and equipment: about 30 percent of total exports
    - Chemical products: about 17 percent
    - Food products: about 11 percent
    - Natural gas: about 10 percent
  - Re-exports:
    - Represent about 45 percent of total exports
    - Explain about a quarter of the trade surplus
    - Increasingly account for the bulk of high value added goods (e.g., pharmaceutical products, office machinery)
  - Geographic pattern:
    - Largest share of Dutch trade surplus with European partners, including Germany
    - Large and increasing deficit with the rest of the world, notably China
  - Services balance: small and negative throughout the period despite substantial inward and outward flows of intellectual property and business services traded by multinationals
- Savings-investment balances and sectoral contributions:
  - The NFC (non-financial corporate) sector accounts for the lion’s share of the savings-investment surplus.
  - NFC sector net lending-borrowing position:
    - Peaked at above 9 percent of GDP in 2012.
  - NFC net savings:
    - Reached about 20 percent of GDP in 2012.
  - Interpretations and mechanisms:
    - Multinationals play a large role: account for about 40 percent of total employment and two thirds of private turnover.
    - NFC net savings increase likely influenced by multinationals’ increased profitability and low profit distributions, shaped by favorable tax incentives (see box on international corporate taxation).
    - Balance sheets of multinationals boosted by dividends and interest payments received from foreign subsidiaries, often exempt from domestic corporate income tax under equity holding and participation exemptions.
    - Exemption on capital gains tax has channeled net savings into share buybacks and equity asset purchases rather than dividend distribution, contributing to deleveraging.
    - National savings have been diverted away from domestic capital formation toward equity foreign direct investment.

### Country-level summary of drivers
- Netherlands:
  - Pre-GFC driver: supportive foreign demand.
  - Post-GFC driver: domestic demand compression via profit retention by multinationals, household deleveraging, increased mandatory and precautionary savings, and pro-cyclical fiscal policy.
- Germany and Switzerland:
  - Pre-GFC driver: competitiveness gains (Germany) and to a lesser extent Switzerland.
  - Post-GFC driver: domestic demand suppression large enough to offset competitiveness losses and weaker foreign demand.

*Prepared by Marc Gerard, Tryggvi Gudmundsson and Jean‑Marc Natal (all EUR). The authors would like to thank officials at DNB, the CPB and the Ministry of Finance for helpful comments and discussions.*

### Box 1. Features of The International Corporate Taxation Regime in The Netherlands

### Box 1. Features of The International Corporate Taxation Regime in The Netherlands

### Overview
- The Netherlands combines its role as a global financial center and strategic seaport location with a favorable international corporate taxation framework that makes it an attractive location for headquarters of multinational enterprises.

### Main features of the regime
- The double ‘participation exemption’, i.e. the non-taxation of both dividends paid by foreign subsidiaries and capital gains on the disposal of foreign equity.
- Low withholding tax rates on interests, royalties and service fees to foreign subsidiaries, including those located in non-EU countries, complemented by a comprehensive double taxation treaty (DTT) network.
- Advanced tax rulings and pricing agreements, bilaterally negotiated with the Ministry of Finance and kept confidential, even vis-à-vis the Parliament.
- A special regime for holdings, which notably provides for low taxes on interest received from loans to foreign subsidiaries.

### Additional fiscal incentives
- Foreign firms can also benefit from various subsidies available to Dutch firms, such as on innovation activities (patent box).

*Source: Box 1. Features of The International Corporate Taxation Regime in The Netherlands (from the provided IMF content).*

### Annex I. Competitiveness, External and

### Annex I. Competitiveness, External and Internal Balances, 1999–2007

### Evolution of REER-ULC, Current Account and Output Gap (Pre- and Post-Crisis)
- Conceptual decomposition:
  - REER-ULC = changes in real relative unit labor costs u/u* = [U/P]/[U*/P*] (labor-market based) + CPI based real effective exchange rates EP/P* (product-market based).
  - E, U* and P* are weighted indices of the 24 most important trading partners for each listed country.
  - A positive change in REER denotes appreciation.
- Table: Changes in CA, REER-ULC and the output gap 1999-2007, % change (Post-Crisis table header ordering preserved: REER-ULC (1)=(2)+(3) u/u* (2) EP/P* (3) Current account (4) Output gap (5))
  - Greece 16.9 9.5 7.5 -22.8 11.4
  - Spain 17.9 -0.6 18.5 -14.2 6.3
  - Ireland 24.6 2.5 22.2 -14.1 5.9
  - Belgium 4.9 -0.3 5.1 -5.6 2.3
  - Portugal 9.4 -2.7 12.1 -5.4 1.0
  - USA - 11.8 2.3 -14.1 -4.4 1.2
  - France 8.0 3.2 4.8 -4.1 2.4
  - Italy 15.9 5.4 10.5 -3.1 4.7
  - Finland 3.8 1.5 2.3 0.5 4.8
  - Netherlands 9.1 -1.4 10.4 5.3 1.0
  - Austria 1.2 -2.8 4.0 7.6 2.2
  - Switzerland -1.0 na -1.6 7.7 3.5
  - Germany -7.6 -4.5 -3.1 9.6 3.1
- Table: Changes in CA, REER-ULC and the output gap 2007-2016, % change
  - Finland 6.3 5.7 0.6 -3.9 -6.4
  - Belgium -0.4 -0.4 -0.1 -1.3 -2.7
  - France -2.0 2.9 -5.0 -0.9 -2.2
  - Austria 0.9 1.8 -0.9 -0.6 -3.3
  - USA 21.7 -1.0 22.8 1.7 -2.0
  - Italy -3.2 0.8 -3.9 3.6 -2.5
  - Germany 2.2 3.9 -1.8 4.0 -2.2
  - Netherlands -0.3 3.9 -4.3 4.2 -2.2
  - Switzerland 38.1 na 34.8 4.4 -4.0
  - Portugal -11.8 -9.9 -2.0 9.7 -0.8
  - Spain -12.1 -4.1 -8.1 11.7 -3.0
  - Greece -16.6 -5.4 -11.2 15.2 -7.0
  - Ireland -31.7 -18.1 -13.6 19.7 3.0

### Tax Reform in the Netherlands — Framing and Main Conclusions
- Objective: quantify macroeconomic effects of budget neutral fiscal reforms that shift taxation away from labor towards property and consumption (VAT) using GIMF.
- Main conclusions:
  - Even a budget neutral shift away from labor can have sizable positive effects on growth and employment.
  - Fiscal policy in a currency union is particularly effective for a single economy because monetary policy responds to euro area wide developments, generating crowding-in rather than crowding-out effects when nominal rates are quasi-fixed.
  - Labor income tax (LIT) is highly distortionary: discourages labor supply, inflates product wages, and weighs on profits and investment. Shifting burden to less distortionary sources boosts labor supply, capital accumulation, and potential output.
  - Effects remain significant even under low labor supply elasticity.

### Context: Dutch Tax Structure
- Key features:
  - Labor income taxation and social contributions bear a high share of taxation.
  - Very progressive and elevated labor tax scale combined with poor incentives for low income workers to join the labor force.
  - Level of social contributions paid by Dutch employees is one of the highest in Europe.
  - Contribution of indirect taxation (VAT) and personal capital income taxation (notably on housing) is among the lowest.
- Housing taxation:
  - Housing (property) tax is the least distortionary instrument with a particularly large tax base in the Netherlands.
  - Tax revenues on personal capital income are actually negative, reflecting subsidy on home ownership via mortgage interest deductibility and low taxation of imputed rents.

### Why GIMF for This Analysis
- Model features:
  - Multi-country, multi-goods dynamic general equilibrium model with forward-looking households and firms, tradable and non-tradable sectors, and import links.
  - Full intertemporal stock-flow consistency and nominal/real frictions (sticky prices and wages, real adjustment costs, financial frictions).
  - Non-Ricardian OLG framework (Blanchard-Weil-Yaari) and liquidity-constrained (LIQ) consumers: LIQ households represent 25 percent of total households in advanced economies and 50 percent in emerging markets.
  - Endogenous monetary policy response important, especially at the ZLB.
  - Fiscal rule maintains a stable long-run debt-to-GDP ratio; ten fiscal instruments are modeled including VAT, CAPIT, LIT, employer and employee SSC, property tax.
  - Calibrated to Netherlands, rest of euro area (ROA) and rest of world (ROW) steady-state great ratios; steady-state tax revenue to GDP ratios computed from published 2013 values.
- Limitations:
  - Abstracts from detailed distributional issues and employment status heterogeneity.
  - No differentiation between extensive and intensive labor margins; employment measured as total hours worked.

### GIMF Implicit Tax Multipliers (1 Percent of GDP Permanent Fiscal Consolidation)
- Setup: permanent increase in tax revenues equal to 1 percent of GDP (approx. 20 percent drop in long-term debt to GDP) via different instruments; reported effects on real GDP at horizons T+1, T+5, T+10 and LT Max. Results shown for FLSE = 0.5 and FLSE = 0.2.
- GDP Effect - level % deviations (FLSE = 0.5)
  - Labor Income: T+1 -0.2, T+5 -0.4, T+10 -0.5, LT Max -0.7
  - Social security (employees): T+1 -0.2, T+5 -0.4, T+10 -0.5, LT Max -0.7
  - Social security (employers): T+1 -0.6, T+5 -0.4, T+10 -0.3, LT Max -1.2
  - Property: T+1 -0.2, T+5 0.8, T+10 0.5, LT Max 0.0
  - VAT: T+1 -0.2, T+5 -0.2, T+10 -0.3, LT Max -0.4
  - Excise: T+1 -0.2, T+5 -0.2, T+10 -0.2, LT Max -0.4
  - Capital income: T+1 -0.7, T+5 -0.4, T+10 -1.4, LT Max -1.4
- GDP Effect - level % deviations (FLSE = 0.2)
  - Labor Income: T+1 -0.7, T+5 -0.2, T+10 -0.2, LT Max -0.3
  - Social security (employees): T+1 -0.2, T+5 -0.2, T+10 -0.3, LT Max -0.3
  - Social security (employers): T+1 -0.5, T+5 -0.3, T+10 -0.3, LT Max -0.6
  - Property: T+1 -0.2, T+5 0.5, T+10 0.2, LT Max 0.0
  - VAT: T+1 -0.2, T+5 -0.1, T+10 -0.2, LT Max -0.2
  - Excise: T+1 -0.2, T+5 -0.1, T+10 -0.2, LT Max -0.2
  - Capital income: T+1 -0.7, T+5 -0.5, T+10 -1.7, LT Max -1.4

### Interpretation of Multipliers and Distributional Effects
- Relative impacts:
  - CAPIT (capital income taxation) has the largest negative effect on employment and output, followed by SSC and LIT.
  - Distortionary taxes that affect capital accumulation and labor supply have the largest long-term effects.
  - CAPIT discourages capital accumulation, lowers future consumption, reduces labor demand and potential output.
  - LIT reduces labor participation; multiplier smaller than CAPIT due to offsetting income and substitution effects.
- SSC distinctions:
  - Employer SSC increases firms’ marginal costs, depresses profits, reduces factor demand (notably labor), lowers consumption and investment, depresses inflation and inflation expectations, raises real interest rates and feeds back negatively on LIQ consumption and output.
  - Employee SSC behaves more like LIT: higher SSC discourages labor supply (substitution effect), leading to relatively higher real wages, higher inflation and lower real interest rates than employer SSC case; LIQ consumption and investment are less affected.

### Growth-Friendly, Budget Neutral Tax Reform Packages (Simulation Design and Key Parameters)
- Simulation conventions:
  - Descriptions in this section refer to the high elasticity case (FLSE = 0.5). The low elasticity case is a dampened version and shown elsewhere.
  - Monetary policy rate assumed fixed for 3 years in simulations.
- Four tax reform packages (TRP1–TRP4):
  - TRP1: permanent drop in labor income taxation financed by an increase in VAT.
    - Assumption: permanent drop of 1.2 percent of GDP in labor income tax revenue offset by an increase in VAT revenues.
    - This 1.2 percent of GDP corresponds to the amount (8.1 billions) that could be collected by unifying the country’s multiple VAT rates (see IMF, 2015).
  - TRP2: permanent drop in labor income taxation financed by an increase in property taxes.
    - Possible implementation: shift housing taxation to Box 3 (wealth tax) or decentralize revenue collection to local governments relying on real estate taxes.
  - TRP3 and TRP4: variations on TRP1 and TRP2 where the decline in labor income taxation is achieved through a decrease in SSC assumed evenly distributed between employers and employees, thus stimulating both labor supply and labor demand.

*Annex I. Competitiveness, External and Internal Balances, 1999–2007 (from cr1778 - Annex I. Competitiveness, External and Internal Balances, 1999–2007).*

### 17.      TRP1—shifting the burden of taxation away from labor income towards consumption

### TRP1—shifting the burden of taxation away from labor income towards consumption

### TRP1: macroeconomic and labor market effects
- Long-term positive effects on employment, capital accumulation, and potential output; short-lived positive impact on the output gap.
- In the high labor supply elasticity case:
  - Hours worked increase by almost 0.3 percent, which amounts to about 17'000 full-time-equivalent (FTE) jobs.
- Mechanism:
  - TRP1 raises labor supply. Although equivalent changes in labor income and consumption tax rates should in principle have similar income and substitution effects, VAT implicitly taxes the existing capital stock (a non-distortionary levy), making VAT relatively less distortionary overall.
  - Higher labor supply pushes real wages, marginal costs, inflation and the real effective exchange rate (REER) down.
  - Improved competitiveness stimulates real exports, but exports increase by less than imports in the short term.
  - Slight but sustained deterioration of the current account as higher expected future output stimulates investment in the short term while higher expected future labor income boosts consumption.
  - Short-term positive effect on domestic demand is magnified by the fixed policy rate assumption.

### TRP2: shifting the burden from labor income towards property
- Larger effects on output and employment than TRP1.
- Quantitative outcomes:
  - Output increases by 0.9 percent in the long term (by year 2055).
  - Employment increases by about 45,500 FTE jobs (long term).
- Mechanism:
  - Both measures (lower labor income tax and higher property tax) stimulate labor supply: lower labor income tax raises the opportunity cost of leisure (substitution effect > income effect); higher property tax lowers disposable income and prompts higher labor supply (income effect) in the medium term.
  - Labor market competition increases, causing real wages to drop by more than 1 percent in the first three years.
  - Induced REER depreciation boosts exports.
  - Lower inflation increases real interest rate and temporarily holds back OLG consumption, investment and imports.
  - Trade balance improves transitorily and the current account improves permanently.
- Low labor supply elasticity case (FLSE = 0.2):
  - Effect on employment is about half: about 21,500 FTE jobs would be created by 2055, and only half of that by 2025.

### TRP3 and TRP4: lowering employers’ and employees’ social security contributions (SSC)
- General setup:
  - Assumes fiscal revenues from employers’ and employees’ SSC are reduced by 0.6 percent of GDP each.
  - Revenue shortfall is compensated by increasing VAT (TRP3) and property tax (TRP4) revenues by 1.2 percent of GDP, consistent with TRP1 and TRP2 revenue shifts.
- Main effects:
  - Real wages increase in TRP3 and TRP4 as lowering employers’ SSC stimulates labor demand.
  - TRP4 is the most effective at boosting output and employment:
    - Employment increase of about 80'000 FTE (long term).
- Mechanisms and trade-offs:
  - Cutting employers’ SSC props up labor demand and compounds positive effects on labor supply from lower employees’ SSC and higher property taxation.
  - REER depreciates despite an increase in real wages (ex-SSC) because firms’ real marginal costs drop following the reduction in employers’ SSC.
  - REER depreciation is too small to offset the short-term increase in consumption and investment; the current account deteriorates despite an increase in exports.
- Low labor supply elasticity case (FLSE = 0.2):
  - TRP4 yields only about 40,000 FTE in the long term (by 2055), and about half this amount by 2025.

### Comparative outcomes across packages (selected summary)
- TRP1: modest employment gains via consumption taxation shift; short-term domestic demand boost; slight sustained current account deterioration.
- TRP2: larger output and employment gains via property taxation; short-term real wage decline, REER depreciation, transitory trade balance improvement, permanent current account improvement.
- TRP3: employer/employee SSC cuts compensated by VAT increase — real wages rise, REER depreciates, current account deteriorates.
- TRP4: employer/employee SSC cuts compensated by property tax increase — largest output and employment gains (about 80'000 FTE under baseline FLSE), similar REER and current-account dynamics as TRP3.

### Policy implications and recommendations
- Growth-friendly, budget-neutral tax reforms that shift the tax burden away from labor toward less distortionary bases can yield long-lasting positive effects on output and employment.
- Among the examined options, dropping social security contributions in favor of higher property taxation would bring the largest benefits.
- Such reforms are particularly relevant for countries with scarce unused productive capacity and limited fiscal space.

*Source: IMF chapter "TRP1—shifting the burden of taxation away from labor income towards consumption" (Kingdom of the Netherlands—Netherlands).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1778.pdf_