Value-added Tax versus Social Security Contributions / Mehrwertsteuer oder Sozialversicherungsabgaben
In order to alleviate unemployment it is often recommended to reduce social security contributions (SSC) and to compensate for the ensuing loss in revenues by a rise in the value-added tax (VAT). Assuming unemployment to be caused by efficiency wages, it is shown that a balanced-budget shift from a payroll tax to a VAT will increase employment if the rise in the VAT does not alter consumer prices. If the effects of a shift from SSC to the VAT on the worker’s effort are neutralised, for example, by imposing a constant wedge, the employment impact will depend on the nature of the unemployment compensation system.
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Volume (Year): 219 (1999)
Issue (Month): 3-4 (June)
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