European Fiscal Harmonization and the French Economy

The implications of European fiscal harmonization for the French economy are examined using a general equilibrium model. The model extends the overlapping generations, simulation model developed by Auerbach and Kotlikoff in three ways: a well-developed external sector is included; households face constraints in their borrowing; and the population comprises "rich" and "poor" households with different labor productivities. The harmonization policy that involves cuts in VAT and savings taxes leads to welfare losses for both rich and poor approximately equivalent to 1 percent of GDP.