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The tax wedge in Slovenia: international comparison and policy recommendations

Author

Listed:
  • Primoz Dolenc

    (Primorska University, Faculty for Management, Koper Ministry of Finance, Ljubljana)

  • Milan Vodopivec

    (Primorska University, Faculty for Management, Koper World Bank, Washington D.C.)

Abstract

When taxes on labor are introduced, a “tax wedge” appears between the labor costs paid by the employer (gross wage) and the net wage received by an employee. At a certain level of wage, a higher tax wedge increases unemployment and decreases employment, all other things being equal. The paper tackles three main questions: the characteristics of the tax wedge, unemployment and employment rates in OECD countries in the recent past, tax wedge policy in the EU15 and the new EU members and the tax system and its effects on the unemployment and employment rates in Slovenia. We found that the OECD countries can be classified into two groups of countries if the tax wedge, the unemployment rate and the employment rate are taken into consideration. The first group is the high tax wedge, high unemployment rate and low employment rate group of countries, whereas the other group has the opposite characteristics. European member states (old and new) have on average a higher tax burden on labor than the OECD average, consequently suffering from higher unemployment rates. Slovenia has an unreasonably high tax wedge; in the EU only Belgium and Germany have a higher tax burden. According to previous and our empirical findings we suggest that Slovenia could benefit from a reduction in the tax wedge.

Suggested Citation

  • Primoz Dolenc & Milan Vodopivec, 2005. "The tax wedge in Slovenia: international comparison and policy recommendations," Financial Theory and Practice, Institute of Public Finance, vol. 29(3), pages 229-243.
  • Handle: RePEc:ipf:finteo:v:29:y:2005:i:3:p:229-243
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    File URL: http://www.ijf.hr/eng/FTP/2005/3/dolenc-vodopivec.pdf
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    References listed on IDEAS

    as
    1. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    2. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, April.
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    Citations

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    Cited by:

    1. Primož Dolenc & Suzana Laporšek, 2012. "Taxing wages and sustainable labour market performance: empirical evidence from OECD and EU countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 4(3), pages 234-253.
    2. Ivica Urban, 2016. "Tax wedge on labour income in Croatia and the European Union : Preface to the special issue of Financial Theory and Practice," Financial Theory and Practice, Institute of Public Finance, vol. 40(2), pages 157-168.
    3. Ana Grdoviæ Gnip & Iva Tomic, 2010. "How hard does the tax bite hurt? Croatian vs. European worker," Financial Theory and Practice, Institute of Public Finance, vol. 34(2), pages 109-142.

    More about this item

    Keywords

    economic policy; tax wedge; Slovenia; EU; OECD.;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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