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Can Tax Progression Raise Employment? A Study of Four European Countries

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John P. Hutton
Anna Ruocco

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Abstract

This paper shows that increases in direct tax progression tend to reduce wages and increase welfare and employment, even in a model allowing for labour supply effects. The employment effect is reversed when benefit levels are low, however. The model shows the different impacts on full and parttime workers, and on men and women. The countries modelled are France, Germany, Italy and the UK. An efficiency wage sector with training costs generates unemployment effects. Households choose between an efficiency wage sector and a market-clearing sector.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 99/21.

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Handle: RePEc:yor:yorken:99/21

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  1. 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. [Downloadable!] (restricted)
  2. Peter Birch Sørensen, 1997. "Optimal Tax Progressivity in Imperfect Labour Markets," Discussion Papers 97-06, University of Copenhagen. Department of Economics. [Downloadable!]
  3. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, January.
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  4. Goerke, Laszlo, 1999. "Efficiency Wages and Taxes," Australian Economic Papers, Blackwell Publishing, vol. 38(2), pages 131-42, June. [Downloadable!] (restricted)
  5. Graafland, Johan J. & de Mooij, Ruud A., 1999. "Fiscal policy and the labour market: An AGE analysis," Economic Modelling, Elsevier, vol. 16(2), pages 189-219, April. [Downloadable!] (restricted)
  6. Campbell, Carl & Orszag, J. Michael, 1998. "A model of the wage curve," Economics Letters, Elsevier, vol. 59(1), pages 119-125, April. [Downloadable!] (restricted)
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  8. Clemens Fuest & Bernd Huber, 1999. "Tax Coordination and Unemployment," International Tax and Public Finance, Springer, vol. 6(1), pages 7-26, February. [Downloadable!] (restricted)
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  9. John Hutton & Anna Ruocco, 1999. "Tax Reform and Employment in Europe," International Tax and Public Finance, Springer, vol. 6(3), pages 263-287, August. [Downloadable!] (restricted)
  10. Peter Birch Sørensen, . "Optimal Tax Progressivity in Imperfect Labour Markets," EPRU Working Paper Series 97-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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