Assessing the impact of a revenue-neutral tax shift away from labour income in Spain

The simulations in this Country Focus show that, to achieve a given reduction in unemployment, a labour tax cut targeted to the low skilled requires a much smaller total tax shift than a cut across the board for all workers. In such targeted scenario, a 1% of GDP tax shift could lower the unemployment rate by 1 percentage point. As equivalent reductions in unemployment can only be achieved with larger tax shifts when labour taxes are cut across-the-board, the positive impact on the trade balance would be stronger in the latter case on the back of more sizable competitiveness gains and larger increases in the taxation of consumption.

The budget neutrality of the reduction in taxation on labour could be assured by hikes in consumption, environmental and/or (recurrent) property taxation, which in the case of the first two are currently below euro area averages.