Does the Wage Tax System cause Budget Deficits?
AbstractThis discussion paper led to a publication in 'Public Choice' 109(3-4) 371-94. In this paper we investigate experimentally the functioning of a wage tax financed unemployment benefit system on the development of the budget deficit, unemployment, and some other indicators of economic performance in an international economy. We find support for the hypothesis that out-of-equilibrium price uncertainty affects the behavior of economic agents. Dueto uncertainty about prices risk-averse producers are hypothesized to be reluctant to employ inputs with the additional effect of too low wages and too high output prices. Our results support this hypothesis of a `risk-compensated price-mechanism'. We also find that the downward pressure on wages is exacerbated by an over-supply of labor by consumers. These observationscan explain the budget deficits we observe in the laboratory economies. Furthermore, we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real GDP.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 00-094/1.
Date of creation: 10 Nov 2000
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Budget deficit; experiment; price uncertainty; unemployment benefit; wage tax;
Find related papers by JEL classification:
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D60 - Microeconomics - - Welfare Economics - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
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