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Optimal Taxation in Search Equilibrium with Home Production

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  • Engström, Per

    ()
    (Department of Economics)

  • Holmlund, Bertil

    ()
    (Department of Economics)

  • Kolm, Ann-Sofie

    ()
    (Department of Economics)

Abstract

The paper develops a two-sector general equilibrium search model where "goods" are produced exclusively in the market and "services" are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving. Numerical calibrations of the model suggest that the welfare gains from tax differentiation are large if the government absorbs a substantial fraction of GDP.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2001:19.

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Length: 39 pages
Date of creation: 22 Oct 2001
Date of revision:
Publication status: Published as the book Optimal Taxation in Search Equilibrium with Home Production, 2005, Oxford Economic Papers.
Handle: RePEc:hhs:uunewp:2001_019

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Related research

Keywords: Taxation; Home production; Search; Unemployment;

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References

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  1. Hian Hoon, 1996. "Payroll taxes and VAT in a labor-turnover model of the ‘natural rate’," International Tax and Public Finance, Springer, vol. 3(3), pages 369-383, July.
  2. Bertil Holmlund, 2002. "International spillover effects of sectoral tax differentiation in unionized economies," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 207-229, April.
  3. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  4. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
  5. Boone, Jan & Bovenberg, Lans, 2002. "Optimal labour taxation and search," Journal of Public Economics, Elsevier, vol. 85(1), pages 53-97, July.
  6. Kolm, Ann-Sofie, 1998. "Labour Taxation in a Unionised Economy with Home Production," Working Paper Series 1998:7, Uppsala University, Department of Economics.
  7. Niels Fredriksen & Peter Hansen & Henrik Jacobsen & Peter Sørensen, 1995. "Subsidising consumer services: effects on employment, welfare and the informal economy," Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 71-93, May.
  8. Kleven, Henrik Jacobsen & Richter, Wolfram F & Sorensen, Peter Birch, 2000. "Optimal Taxation with Household Production," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 584-94, July.
  9. Christopher Pissarides, 1997. "The impact of employment tax cuts on unemployment and wages : the role of unemployment benefits and tax structure," LSE Research Online Documents on Economics 2332, London School of Economics and Political Science, LSE Library.
  10. Michael Smart, 1998. "Flat tax reform," Working Papers msmart-98-01, University of Toronto, Department of Economics.
  11. Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.
  12. Ann-Sofie Kolm & Birthe Larsen, 2003. "Wages, Unemployment, and the Underground Economy," CESifo Working Paper Series 1086, CESifo Group Munich.
  13. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  14. Phelps, Edmund S & Zoega, Gylfi, 1998. "Natural-Rate Theory and OECD Unemployment," Economic Journal, Royal Economic Society, vol. 108(448), pages 782-801, May.
  15. Bovenberg, A Lans & van der Ploeg, Frederick, 1998. " Tax Reform, Structural Unemployment and the Environment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 593-610, September.
  16. Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, vol. 70(2), pages 255-271, November.
  17. Dale T Mortensen & Christopher Pissarides, 2001. "Taxes, subsidies and equilibrium labor market outcomes," LSE Research Online Documents on Economics 2075, London School of Economics and Political Science, LSE Library.
  18. Hoon, Hian Teck & Phelps, Edmund S., 1997. "Growth, wealth and the natural rate: Is Europe's jobs crisis a growth crisis?," European Economic Review, Elsevier, vol. 41(3-5), pages 549-557, April.
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Citations

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Cited by:
  1. Olivier CHARLOT, 2005. "Education, emploi et participation au marché du travail dans un modèle d’appariement," Discussion Papers (REL - Recherches Economiques de Louvain) 2005012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Zhang, Jie & Davies, James & Zeng, Jinli & McDonald, Stuart, 2008. "Optimal taxation in a growth model with public consumption and home production," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 885-896, April.
  3. Olivier, PIERARD, 2004. "Impact of Selective Reductions in Labor Taxation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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