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Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off

European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Yet, economists have stressed the trade-off between these objectives. This paper reviews the key policy insights from optimal tax theory to identify options for reform in the tax-benefit system that can potentially improve the equity-efficiency trade-off. Using a comprehensive applied general equilibrium model, we then explore whether reforms along these lines in the actual Dutch tax-benefit system will raise employment without sacrificing equality. The analysis reveals that selective tax relief for elastic secondary earners and low-skilled workers have this potential. A flat income tax structure possibly combined with a negative income tax worsens the equity-efficiency trade-off.

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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 15 (2008)
Issue (Month): 1 (February)
Pages: 87-103

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Handle: RePEc:kap:itaxpf:v:15:y:2008:i:1:p:87-103
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