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Economics Research International
Volume 2012 (2012), Article ID 461597, 12 pages
Research Article

What Are the Economic and Labour Market Effects of an Income Tax Reduction Targeted at Older Workers?

Human Resources and Skills Development Canada, 140 Promenade du Portage, Phase 4, 3rd floor, Gatineau, QC, Canada K1A 0J9

Received 29 August 2011; Revised 6 March 2012; Accepted 16 April 2012

Academic Editor: Bernard Fortin

Copyright © 2012 Maxime Fougère et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


This paper explores the economic and labour market effects of implementing a tax reduction targeted at older workers. The analysis is conducted with a life-cycle computable general equilibrium model calibrated on Canadian data. The analysis shows that implementing a permanent income tax reduction for workers aged 60 and over has only small macroeconomic effects because the labour supply increase of older workers is partly offset by a reduction in the labour supply at core ages. This induced effect also discourages savings and generates crowding out through private investment but has a favourable impact on lifetime economic welfare. The macroeconomic impact is much larger when the income tax reduction is temporary because workers no longer reduce their hours at core ages and there is no reduction in savings. However, since only current middle-aged and older workers benefit from the tax cut, a temporary income tax cut reduces intergenerational equity.