Publications

The goal of this paper is to examine the dynamic effects of fiscal instruments in Lithuania on the economy and welfare. In the analysis, a calibrated dynamic stochastic general equilibrium model for Lithuania is employed. The calculation implies that 9-16 percent of tax cuts are self-financing in the long run. It suggests that the slope of Laffer curve in Lithuanian economy is rather flat. The analysis of effects of different tax cuts shows that the impact of 1 percentage point permanent decrease in statutory tax rate on gross domestic product is very small (within the range of –0.15 through 0.15 percent in all cases). The estimated government expenditure multiplier has a different sign in the long run when various financing sources are used to balance the government budget.

JEL Codes: E62, H24, H25.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

In this paper, the economic impact of the 2006–2008 personal income tax (PIT) reform in Lithuania is analyzed applying model-based simulations. We find that the undertaken PIT reform is unsustainable as it leads to permanent government budget deficits and ever increasing public debt. This result holds even allowing for endogenous reduction in tax evasion. After introducing permanent compensatory fiscal measures ensuring long-term sustainability of the PIT reduction, we demonstrate that the lower PIT produces higher output and lower prices in the long run. Higher domestic spending is supported by higher employment and after-tax wages. Moreover, following a reduction in the marginal production costs, producer prices fall enhancing economy’s international competitiveness and boosting domestic exports. Pre-announcement of the tax reform implies early macroeconomic reaction, and thus in most cases smoother adjustment of the economy to the tax change.

JEL Codes: E62, H24, H25, H26.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.