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Tax Reform and the Dutch Labor Market: An Applied General Equilibrium Approach

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  • A. Lans Bovenberg
  • Johan J. Graafland
  • Ruud A. de Mooij

Abstract

This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labor supply. MIMIC combines modern labor-market theories, a firm empirical foundation detailed description of Dutch labor-market institutions. We develop a small aggregate model which contains the core of MIMIC, namely wage setting, job matching, labor supply demand. In addition to illustrating the main economic mechanisms in MIMIC shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms. Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment quality and quantity of labor supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply but are less effective in reducing unemployment and in raising unskilled employment and female labor supply.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6693.

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Date of creation: Aug 1998
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Publication status: published as Bovenberg, A. Lans & Graafland, Johan J. & de Mooij, Ruud A., 2000. "Tax reform and the Dutch labor market: an applied general equilibrium approach," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 193-214, October.
Handle: RePEc:nbr:nberwo:6693

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  1. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
  2. Scholz, John Karl, 1996. "In-Work Benefits in the United States: The Earned Income Tax Credit," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(434), pages 156-69, January.
  3. van Ours, J., 1991. "The Efficiency of the Dutch Labour Market in Matching Unemployment and Vacancies," Open Access publications from Tilburg University urn:nbn:nl:ui:12-142205, Tilburg University.
  4. Boone, J. & Nieuwenhuis, A., 1999. "Tax policy and the labor market: A sensitivity analysis with an AGE model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-81830, Tilburg University.
  5. Graafland, J.J. & Huizinga, F.H., 1998. "Taxes and benefits in a non-linear wage equation," MPRA Paper 21076, University Library of Munich, Germany.
  6. Browning, Edgar K., 1995. "Effects of the Earned Income Tax Credit on Income and Welfare," National Tax Journal, National Tax Association, vol. 48(1), pages 23-43, March.
  7. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  8. Bovenberg, A Lans & de Mooij, Ruud A & Graafland, Johan J, 1998. "Tax Reform and the Dutch Labour Market: An Applied General Equilibrium Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1983, C.E.P.R. Discussion Papers.
  9. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  10. Theeuwes, J. & Koopmans, C. C. & Van Opstal, R. & Van Reijn, H., 1985. "Estimation of optimal human capital accumulation parameters for The Netherlands," European Economic Review, Elsevier, Elsevier, vol. 29(2), pages 233-257.
  11. Robert Haveman, 1995. "Reducing Poverty while Increasing Employment: A Primer on Alternative Strategies, and a Blueprint," OECD Jobs Study Working Papers, OECD Publishing 7, OECD Publishing.
  12. Stacy Dickert & Scott Houser & John Karl Scholz, 1995. "The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 1-50 National Bureau of Economic Research, Inc.
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