Tax Reform 2022-2024 – Macroeconomic Effects

This article estimates ex ante effects of the 2022-2024 tax reform as adopted by the council of ministers on 15 December 2021. Two variants of the WIFO macroeconomic model (Macromod) are applied: the standard model to facilitate comparison with previous tax reform assessments, and a model variant that assumes a weaker short-term response of private consumption to income changes. This second variant aims to account for significantly increased private saving during the COVID-19 crisis and its impact on private consumption demand; it was used by WIFO to assess the macroeconomic impact of the tax reform measures. The results of the model simulations are expressed as cumulative deviations from the baseline scenario – the medium-term WIFO forecast 2022 to 2026 without tax reform of 8 October 2021. The tax reform will relieve private households by 25 billion € in the period 2022 to 2026 (according to WIFO estimates). Firms will be supported by a cumulative amount of 2.8 billion € from 2023 (becoming effective in 2024) to 2026. Compared with the Draft of the Federal Finance Act of 18 November, the relief for private households in the final draft submitted to the parliament, the tax reform is 400 million € higher in 2022, but cumulatively 850 million € lower by 2026. The government's revenue loss is dampened by a CO2 tax and additional revenues resulting from higher economic activity induced by the tax cuts (by 16 percent in 2022 and by 64 percent in 2026). Compared with the baseline scenario, the tax reform will increase real GDP by 0.8 percent and employment by 27,600 persons (+0.6 percent); government debt rises by 13.2 billion € and the debt ratio by 1.5 percentage points by 2026 (in cumulative terms by 2026).