How Does Tax Relief Influence Economic Development and Tax Revenue? A Quantitative Analysis with a CGE Model

This paper examines the effects of various tax reforms currently under discussion on tax revenue and other economic variables. Reducing the corporate income tax by 5 percentage points leads in the short run to a decrease in tax revenue of EUR 13.8 billion. In the long term, the annual tax losses are smaller because investment and employment increase. A combination of a corporate tax cut and accelerated depreciation would reduce tax revenue by as much as EUR 30 billion in the short term. In return, investment and employment would increase so strongly that annual tax revenue would rise back up to its initial level in the medium term. However, gross domestic product and private household consumption would be around 3 percent higher than without reform.