TAXES AND SUBSIDIES IN A MULTISECTORAL ECONOMETRIC-MODEL

This paper examines medium-term adjustments to tax-subsidy shifts by means of simulations with a Jorgenson-type econometric model for the Federal Republic of Germany, Under a balanced budget assumption, the results show that relative prices move in the expected direction, whereas aggregate price effects are negligible, The impacts of compensated subsidy cuts on income, sectoral production and employment scarcely depend on the intensities and price elasticities of factor demand in the affected industries. Simulation results for the most favoured sectors in Germany suggest that demand shifts induced by subsidy cuts may cause losses of total employment or a decrease in aggregate production, As the perfect competition framework of the simulation tool does not refer to possible gains in competitiveness, the sketched macroeconomic developments may be accompanied by positive effects of compensated subsidy cuts which are not treated here.