Reforming Labour Taxation: Addressing the Employment Effects of Technological Progress

As technological progress rapidly transforms the labour market, traditional labour taxation systems face a double challenge: declining tax revenues and the growing need to finance social security systems. This study analyses the impact of labour income tax cuts on employment in the context of technological progress using a general equilibrium model calibrated for the European Union economic zone. The simulation results show that labour income tax cuts have a positive effect on employment, especially at lower levels of automation, but that this effect weakens with increasing levels of automation. The study reveals that while tax cuts stimulate economic activity and partly compensate for the loss of tax revenue through increased consumption and investment, there is a persistent negative impact on government revenue. This points to the need to find alternative sources of tax revenue to ensure the sustainability of public finances in the context of technological progress.