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Employment and Growth Effects of Tax Reforms

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Author Info
Michaelis, Jochen
Birk, Angela

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Abstract

This paper explores how revenue-neutral tax reforms impact employment and economic growth in a model of endogenous growth and search frictions on the labor market. We analyze how savings and the incentive to create new jobs are affected by tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, the payroll tax is found to be neutral. If this tax is used to finance a cut in the capital income tax, we will observe an increase in both growth and, via the capitalization effect, employment. Most other tax reforms, however, imply a trade-off between employment and growth.

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Paper provided by Hamburg Institute of International Economics in its series Discussion Paper Series with number 26275.

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Date of creation: 2004
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Handle: RePEc:ags:hiiedp:26275

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Related research
Keywords: search unemployment; growth; tax reform; Public Economics; E6; H2; J6; O4;

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References listed on IDEAS
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  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  5. Lans Bovenberg, A. & de Mooij, Ruud A., 1997. "Environmental tax reform and endogenous growth," Journal of Public Economics, Elsevier, vol. 63(2), pages 207-237, January. [Downloadable!] (restricted)
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  6. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August. [Downloadable!] (restricted)
  7. Jochen Michaelis & Angela Birk, 2004. "Employment- and Growth Effects of Tax Reforms," Discussion Papers in Economics 58/04, University of Kassel, Institute of Economics. [Downloadable!]
    Other versions:
  8. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 47-104, 04. [Downloadable!] (restricted)
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  9. Lutz Arnold, 1999. "Does Policy Affect Growth?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(2), pages 141-, June.
  10. Bondonio, Daniele, 2002. "Evaluating the Employment Impact of Business Incentive Programs in EU Disadvantaged Areas. A case from Northern Italy," P.O.L.I.S. department's Working Papers 27, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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  12. Goerke, L., 1996. "Taxes on Payroll, Revenues and Profits in Three Models of Collective Bargaining," Discussion Paper Series In Economics And Econometrics 9603, Economics Division, School of Social Sciences, University of Southampton.
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  13. Aghion, Philippe & Howitt, Peter, 1994. "Growth and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 477-94, July. [Downloadable!] (restricted)
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  14. Motohiro Yogo, 2004. "Estimating the Elasticity of Intertemporal Substitution When Instruments Are Weak," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 797-810, 03. [Downloadable!] (restricted)
  15. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August. [Downloadable!] (restricted)
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  18. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March. [Downloadable!] (restricted)
  19. Kim, Se-Jik, 1998. "Growth effect of taxes in an endogenous growth model: to what extent do taxes affect economic growth?," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 125-158, September. [Downloadable!] (restricted)
  20. Jochen Michaelis & Michael Pflüger, 2000. "The impact of tax reforms on unemployment in a SMOPEC," Journal of Economics, Springer, vol. 72(2), pages 175-201, June. [Downloadable!] (restricted)
  21. Bean, Charles & Pissarides, Christopher, 1993. "Unemployment, consumption and growth," European Economic Review, Elsevier, vol. 37(4), pages 837-854, May. [Downloadable!] (restricted)
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  22. Ellingsen, Tore & Rosén, Åsa, 1997. "Fixed or Flexible? Wage Setting in Search Equilibrium," Working Paper Series in Economics and Finance 185, Stockholm School of Economics. [Downloadable!]
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  23. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR, CES, MSH, vol. 12(25), pages 221-264, October. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hans-Friedrich Eckey & Reinhold Kosfeld & Matthias Türck, 2007. "Anmerkung zur Identifikation von Förderregionen in der "Gemeinschaftsaufgabe"," Discussion Papers in Economics 90/07, University of Kassel, Institute of Economics. [Downloadable!]
  2. Jochen Michaelis & Angela Birk, 2004. "Employment- and Growth Effects of Tax Reforms," Discussion Papers in Economics 58/04, University of Kassel, Institute of Economics. [Downloadable!]
    Other versions:
  3. Hans-Friedrich Eckey & Matthias Türck, 2006. "Convergence of EU-Regions. A Literature Report," Discussion Papers in Economics 80/06, University of Kassel, Institute of Economics. [Downloadable!]
  4. Reinhold Kosfeld & Hans-Friedrich Eckey & Jorgen Lauridsen, 2007. "Disparities in Prices and Income Across German NUTS 3 Regions," Discussion Papers in Economics 93/07, University of Kassel, Institute of Economics. [Downloadable!]
    Other versions:
  5. Jochen Michaelis, 2007. "Internationaler Handel," Discussion Papers in Economics 91/07, University of Kassel, Institute of Economics. [Downloadable!]
  6. Jochen Michaelis & Alexander Spermann, 2009. "Geringqualifizierte Arbeit, Marktlöhne und Sozialpolitik: Konzepte für Deutschland," MAGKS Papers on Economics 200920, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
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