Which taxes should be reduced to foster employment and growth? A Fiscal simulation framework for Madagascar

Andrianady, Josué R. (2026): Which taxes should be reduced to foster employment and growth? A Fiscal simulation framework for Madagascar. Published in:

Abstract

This paper develops a structural fiscal simulation model to evaluate the macroeconomic and budgetary effects of alternative tax reform scenarios in Madagascar. The model examines the impact of reductions in value-added tax (VAT), personal income tax (IRSA), employers’ social contributions, and customs duties, both individually and in combination, on output, employment, and public revenues. Simulation results show that isolated cuts in VAT or IRSA have negligible effects on production and employment but lead to substantial revenue losses. By contrast, lowering employers’ social contributions stimulates employment (+2.8%) and output (+1.8%) while limiting fiscal costs, highlighting the sensitivity of labor demand to labor costs. Reductions in customs duties modestly increase output (+1.9%) but do not affect employment significantly and generate large revenue shortfalls. A combined reform package maximizes output (+3.7%) and employment (+2.8%) but at a significant cost to public revenues (-39%), raising concerns about fiscal sustainability. Overall, targeted reductions in labor taxation emerge as the most effective instrument for promoting employment and growth while preserving fiscal balance in a developing-country context. The model provides a first-order analytical framework for Madagascar and a benchmark for future studies incorporating informality, distributional effects, and dynamic adjustments.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal policy; Tax reform; Employment; Public revenues; Madagascar.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

[1]{Bird1997} Bird richard and Wayne Thirsk (eds.). \textit{Tax Reform in Developing Countries}. World Bank, 1997.

[2]{CobbDouglas1928} Charles W. Cobb and Paul H. Douglas. \textit{A theory of production}. American Economic Review, 18(1):139--165, 1928.

[3]{Douglas1976} Douglas Paul. \textit{The cobb-douglas production function once again: Its history, its testing, and some new empirical values}. Journal of Political Economy, 84(5):903--915, 1976.

[4]{Hamermesh1993} Hamermesh Daniel S. . \textit{Labor Demand}. Princeton University Press, 1993.

[5]{ILO2018} International Labour Organization. \textit{World employment and social outlook: Trends 2018}. Technical report, ILO, 2018.

[6]{IMF2020} International Monetary Fund. \textit{Fiscal monitor: Policies to support people during the covid-19 pandemic}. Technical report, IMF, 2020.

[7]{IMF2025} International Monetary Fund. \textit{Republic of Madagascar: Staff Report for the 2024 Article IV Consultation; First Review Under the Extended Credit Facility Arrangement}. IMF Country Report No. 25/085, 2025.

[8]{MartinezVazquez2021} Martinez-Vazquez Jorge. \textit{Successful tax reforms in the recent international experience: Lessons in political economy and the nuts and bolts of increasing country tax revenue effort}. International Center for Public Policy Working Paper 21-15, Andrew Young School of Policy Studies, Georgia State University, 2021.

[9]{Mirrlees1971} Mirrlees James A.. \textit{An exploration in the theory of optimum income taxation}. Review of Economic Studies, 38(2):175--208, 1971.

[10]{OECD2015} Organisation for Economic Co-operation and Development. \textit{In it together: Why less inequality benefits all}. Technical report, OECD, 2015.

[11]{PwC2025} PwC. \textit{Worldwide Tax Summaries: Madagascar}. PwC, November 2025. \url{https://taxsummaries.pwc.com/madagascar}.

[12]{reinhart1995} Reinhart Carmen M.. Devaluation, relative prices, and international trade. \emph{IMF Staff Papers}, 42(2):290--312, 1995.

[13]{Stiglitz1987} Stiglitz Joseph E. . \textit{Pareto efficient and optimal taxation and the new new welfare economics}. In \textit{Handbook of Public Economics}, volume 2, pages 991--1042. Elsevier, 1987.

[14]{Tanzi1970} Tanzi Vito. \textit{Tax systems and policy objectives in developing countries: General principles and diagnostic tests}. Inter-American Center of Tax Administrations Review, 3:1--20, 1970.

[15]{WorldBank2025} World Bank. \textit{Madagascar Economic Update: Bridging the Productivity Divide}. World Bank Group, February 2025.