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Tax Policy and Labor Market Performance

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Author Info
Lans Bovenberg ()

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Abstract

In exploring the impact of tax policy on labor-market performance, the paper first investigates how tax reform impacts labor supply and equilibrium unemployment in representative agent models. The impact of tax policy on labor market performance depends importantly on various other labor-market institutions, such as minimum wage laws, wage bargaining, and unemployment benefits. In non-competitive labor markets, employment declines if a higher tax burden makes the outside option (i.e. unemployment) relatively more attractive. Marginal tax rates typically differ substantially across individuals. To explore the impact of specific tax policies, therefore, the paper relies on an applied general equilibrium model to investigate the consequences of tax reform with heterogeneous households. The model simulations reveal several trade-offs between various objectives, such as cutting unemployment, stimulating the participation of secondary workers into the labor force, raising the quality and quantity of labor supply, and establishing an equitable income distribution. The paper also analyses how efficiency considerations affect the optimal progressiveness of labor income taxes. Finally, the optimal progression of the labor income tax is investigated in the presence of search unemployment, heterogeneous households and distributional concerns.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1035.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1035

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Find related papers by JEL classification:
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
I20 - Health, Education, and Welfare - - Education - - - General
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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References listed on IDEAS
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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. Bertil Holmlund & Martin Söderström, 2007. "Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  2. Florian Baumann & Nikolai Stähler, 2005. "Financing Unemployment Benefits: Dismissal versus Employment Taxes," Working Papers of the Research Group Heterogenous Labor 05-03, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim. [Downloadable!]
    Other versions:
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