Tax Stimulus as Crisis Response

A new paper from Simeon Djankov, a regular contributor to Crisis Talk, and Georgi Angelov, a Senior Economist at the Open Society Institute, argues for the merits of tax incentives in dealing with the crisis. From the abstract: 

Many countries are contemplating stimulus packages as a response to the deepening economic crisis. This paper discusses the benefits of tax reform as a crisis-response measure. It provides a calculation of the benefits of such reform, taking as an example the reduction of payroll taxes in Bulgaria. We also estimate the costs in terms of foregone revenue. We find that a reform to reduce the payroll tax by 7.5 percentage points, from 31.3% to 23.8%, would result in 130,000 jobs being created or saved, and a 0.5% increase in annual GDP growth. Taking the static and dynamic effects of such reform into account, the cost would amount to 0.63% of GDP. The reform has three additional benefits. First, it is not subject to corruption: the government is not in a position to distribute largesse as under a fiscal expansion program. Second, it works as a direct stimulus - every business and worker in the formal economy gets the benefit. Third, tax reform is quick to implement and can have immediate effects.

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