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On Substituting Consumption Taxes for Unemployment Insurance Contributions to Reduce Unemployment

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The German conservative party (consisting of two sister parties) planned in case of victory in the national election on 18 September 2005 to reduce the unemployment insurance contributions by 2 percent and to finance this with an increase in the consumption tax by 2 percent. The present paper shows in a Layard-Nickell-Jackman type wage bargaining model that this tax reform does not reduce unemployment; neither in the short to medium run, nor in the long run. When there is short-to-medium-run real wage resistance, then in the short to medium run unemployment depends on the overall tax burden, but not on the composition of the tax burden. In the long run the wage setting curve is vertical and hence in the long run unemployment is even invariant of the overall tax burden.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Kogel-ECP05-11.pdf
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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2005_11.

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Date of creation: Sep 2005
Date of revision: Sep 2005
Handle: RePEc:lbo:lbowps:2005_11

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Keywords: Consumption taxes; unemployment insurance contributions; payroll taxes. wage bargaining; unemployment.;

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  1. Goerke, Laszlo, 2001. "Tax Evasion in a Unionised Economy," IZA Discussion Papers 382, Institute for the Study of Labor (IZA).
  2. 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.
  3. Koskela, E. & Schob, R., 1998. "Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining," University of Helsinki, Department of Economics 443, Department of Economics.
  4. Pierre Picard & Eric Toulemonde, 2000. "Taxation and Labor Markets," Econometric Society World Congress 2000 Contributed Papers 0707, Econometric Society.
  5. Creedy, John & McDonald, Ian M, 1992. "Union Wage Responses to a Shift from Direct to Indirect Taxation," Bulletin of Economic Research, Wiley Blackwell, vol. 44(3), pages 221-32, July.
  6. Burda, Michael & Wyplosz, Charles, 2012. "Macroeconomics: A European Text," OUP Catalogue, Oxford University Press, edition 6, number 9780199608645.
  7. Picard, Pierre M & Toulemonde, Eric, 2001. "On the Equivalence of Taxes Paid by Employers and Employees," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(4), pages 461-70, September.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  9. Goerke, Laszlo, 2000. "Labour Taxation, Efficiency Wages and the Long Run," Bulletin of Economic Research, Wiley Blackwell, vol. 52(4), pages 341-52, October.
  10. Carlin, Wendy & Soskice, David, 2005. "Macroeconomics: Imperfections, Institutions, and Policies," OUP Catalogue, Oxford University Press, number 9780198776222.
  11. 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.
  12. Goerke, Laszlo, 1996. "Taxes on Payroll, Revenues and Profits in Three Models of Collective Bargaining," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(5), pages 549-65, November.
  13. Clemens Fuest & Bernd Huber, 1997. "Wage bargaining, labor-tax progression, and welfare," Journal of Economics, Springer, vol. 66(2), pages 127-150, June.
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