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Taxes and employment - is there a Scandinavia puzzle ?

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  • Torben M. Andersen
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    Abstract

    Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation despite high tax rates and a generous social safety net.This paper considers the experience of European countries and Scandinavia compared to the US and asks whether Scandinavian countries are outliers. First, it is argued that the simple "tax argument" does not capture the European experience since labour force participation for some age groups is at the same or a higher level than the US. Second, it is argued that even though the social safety net is generous in Scandinavian countries, it is also very employment conditional. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. The design of the social safety net is therefore important in accounting for the Scandinavian experience.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication13935_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 359.

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    Length: 333 pages
    Date of creation: Feb 2009
    Date of revision:
    Handle: RePEc:euf:ecopap:0359

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    Related research

    Keywords: Taxes and employment; is there a Scandinavia puzzle? taxation of labour; employment; labour force participation; social safety net; Andersen;

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    1. Alesina, Alberto F & Glaeser, Edward L & Sacerdote, Bruce, 2005. "Work and Leisure in the US and Europe: Why So Different?," CEPR Discussion Papers 5140, C.E.P.R. Discussion Papers.
    2. Raj Chetty, 2008. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," NBER Working Papers 13844, National Bureau of Economic Research, Inc.
    3. Michiel Evers & Ruud de Mooij & Daniel van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 2002. "Social Norms and Welfare State Dynamics," Working Paper Series 585, Research Institute of Industrial Economics.
    5. Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
    6. Pedersen, Peder J. & Smith, Nina, 2002. "Unemployment Traps: Do Financial Dis-incentives matter?," CLS Working Papers 01-1, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
    7. Richard Rogerson, 2007. "Taxation and market work: is Scandinavia an outlier?," Economic Theory, Springer, vol. 32(1), pages 59-85, July.
    8. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
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    Cited by:
    1. Erling Holmøy, 2014. "The equilibrium relationship between public and total employment. The importance of endogenous non-labour income," Discussion Papers 779, Research Department of Statistics Norway.

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