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The tax wedge in Slovenia: international comparison and policy recommendations

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Author Info

  • Primoz Dolenc

    (Primorska University, Faculty for Management, Koper Ministry of Finance, Ljubljana)

  • Milan Vodopivec

    (Primorska University, Faculty for Management, Koper World Bank, Washington D.C.)

Abstract

When taxes on labor are introduced, a “tax wedge” appears between the labor costs paid by the employer (gross wage) and the net wage received by an employee. At a certain level of wage, a higher tax wedge increases unemployment and decreases employment, all other things being equal. The paper tackles three main questions: the characteristics of the tax wedge, unemployment and employment rates in OECD countries in the recent past, tax wedge policy in the EU15 and the new EU members and the tax system and its effects on the unemployment and employment rates in Slovenia. We found that the OECD countries can be classified into two groups of countries if the tax wedge, the unemployment rate and the employment rate are taken into consideration. The first group is the high tax wedge, high unemployment rate and low employment rate group of countries, whereas the other group has the opposite characteristics. European member states (old and new) have on average a higher tax burden on labor than the OECD average, consequently suffering from higher unemployment rates. Slovenia has an unreasonably high tax wedge; in the EU only Belgium and Germany have a higher tax burden. According to previous and our empirical findings we suggest that Slovenia could benefit from a reduction in the tax wedge.

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Bibliographic Info

Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

Volume (Year): 29 (2005)
Issue (Month): 3 ()
Pages: 229-243

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Handle: RePEc:ipf:finteo:v:29:y:2005:i:3:p:229-243

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Related research

Keywords: economic policy; tax wedge; Slovenia; EU; OECD.;

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  1. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
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Cited by:
  1. Ana Grdoviæ Gnip & Iva Tomic, 2010. "How hard does the tax bite hurt? Croatian vs. European worker," Financial Theory and Practice, Institute of Public Finance, vol. 34(2), pages 109-142.

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