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Submitted by Wolfgang on

Chris,

many thanks. Indeed, each tax policy measure needs to be carefully reviewed as they involve many trade-offs. If you lower taxes on labor in a country where the budget is mainly financed by these revenues you will create a whole in the budget (at least in the short-term). Compensating it by raising consumption taxes could also hurt a portion of the (urban) poor. However, many Countries in the Balkans (and also in other parts of Europe) are facing a strong imbalance where taxes on labor are just too high, especially for the lower skilled. This also explains why so few of them have a formal job. See this blog from Sebastian Eckardt and his colleagues who looked at this issued in-depth:
http://blogs.worldbank.org/futuredevelopment/can-tax-reforms-help-create-jobs