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Tax reforms under market distortions in product and labour markets

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  • Angelopoulos, Konstantinos
  • Jiang, Wei
  • Malley, James R.

Abstract

Using a two-agent model comprised of capitalists and workers, this paper examines the importance of imperfect competition in product and labour markets in determining the welfare effects of tax reform. The reform considered consists of eliminating the capital tax alongside a concurrent rise in the labour tax. In contrast to the perfectly competitive model, models with product or labour market failures each result in welfare losses for the workers in the long-run. In a realistic calibration to the UK economy, combining these imperfections implies that this tax reform will be Pareto improving in the long-run. However, these welfare gains over longer time horizons come at the cost of short-run losses, which, consistent with previous research, result in welfare losses for workers post-reform.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 61 (2013)
Issue (Month): C ()
Pages: 28-42

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Handle: RePEc:eee:eecrev:v:61:y:2013:i:c:p:28-42

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Market imperfections; Heterogeneous agents; Unemployment; Tax reform;

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References

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Cited by:
  1. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2013. "Human Capital, Social Mobility and the Skill Premium," CESifo Working Paper Series 4388, CESifo Group Munich.
  2. Konstantinos Angelopoulos & Stylianos Asimakopoulos & James Malley, 2014. "Tax smoothing in a business cycle model with capital-skill complementarity," Working Papers 2014_05, Business School - Economics, University of Glasgow.

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