IDEAS home Printed from https://ideas.repec.org/p/ags/hwwadp/26275.html
   My bibliography  Save this paper

Employment and Growth Effects of Tax Reforms

Author

Listed:
  • Michaelis, Jochen
  • Birk, Angela

Abstract

This paper explores how revenue-neutral tax reforms impact employment and economic growth in a model of endogenous growth and search frictions on the labor market. We analyze how savings and the incentive to create new jobs are affected by tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, the payroll tax is found to be neutral. If this tax is used to finance a cut in the capital income tax, we will observe an increase in both growth and, via the capitalization effect, employment. Most other tax reforms, however, imply a trade-off between employment and growth.

Suggested Citation

  • Michaelis, Jochen & Birk, Angela, 2004. "Employment and Growth Effects of Tax Reforms," Discussion Paper Series 26275, Hamburg Institute of International Economics.
    • Handle: RePEc:ags:hwwadp:26275
    DOI: 10.22004/ag.econ.26275
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/26275/files/dp040283.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.26275?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    3. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    6. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    7. Isabelle Joumard, 2003. "Tax systems in European Union countries," OECD Economic Studies, OECD Publishing, vol. 2002(1), pages 91-151.
    8. Motohiro Yogo, 2004. "Estimating the Elasticity of Intertemporal Substitution When Instruments Are Weak," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 797-810, August.
    9. Birk, Angela, 2001. "Qualification-Mismatch and Long-Term Unemployment in a Growth-Matching Model," Discussion Paper Series 26181, Hamburg Institute of International Economics.
    10. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 765-783.
    11. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
    12. 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.
    13. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    14. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    15. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    16. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
    17. Tore Ellingsen & Asa Rosen, 2003. "Fixed or Flexible? Wage-setting in Search Equilibrium," Economica, London School of Economics and Political Science, vol. 70(278), pages 233-250, May.
    18. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    19. Wojciech Kopczuk & Joseph P. Lupton, 2007. "To Leave or Not to Leave: The Distribution of Bequest Motives," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 207-235.
    20. Zanchi, Luisa, 2000. "Recent Contributions to the Search Theory of the Labour Market: Introduction," Bulletin of Economic Research, Wiley Blackwell, vol. 52(4), pages 257-260, October.
    21. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    22. Lutz Arnold, 1999. "Does Policy Affect Growth?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(2), pages 141-141, June.
    23. Corsetti, Giancarlo & Dedola, Luca, 2002. "Macroeconomics of international price discrimination," Working Paper Series 176, European Central Bank.
    24. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    25. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
    26. Turnovsky, Stephen J., 2000. "Fiscal policy, elastic labor supply, and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 185-210, February.
    27. Goerke, Laszlo, 1996. "Taxes on Payroll, Revenues and Profits in Three Models of Collective Bargaining," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(5), pages 549-565, November.
    28. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
    29. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    30. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 48-104.
    31. Brauninger, Michael & Pannenberg, Markus, 2002. "Unemployment and productivity growth: an empirical analysis within an augmented Solow model," Economic Modelling, Elsevier, vol. 19(1), pages 105-120, January.
    32. Creedy, John & McDonald, Ian M, 1992. "Union Wage Responses to a Shift from Direct to Indirect Taxation," Bulletin of Economic Research, Wiley Blackwell, vol. 44(3), pages 221-232, July.
    33. Birk, Angela, 2001. "Qualification-mismatch and long-term unemployment in a growth-matching model," HWWA Discussion Papers 128, Hamburg Institute of International Economics (HWWA).
    34. Lans Bovenberg, A. & de Mooij, Ruud A., 1997. "Environmental tax reform and endogenous growth," Journal of Public Economics, Elsevier, vol. 63(2), pages 207-237, January.
    35. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    36. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 743-764.
    37. Gianluca Benigno & Pierpaolo Benigno, 2004. "Designing Target Rules for International Monetary Policy Cooperation," CEP Discussion Papers dp0666, Centre for Economic Performance, LSE.
    38. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
    39. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
    40. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 477-494.
    41. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
    42. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    43. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, December.
    44. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
    45. 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.
    46. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    47. Fabio Aricó, 2003. "Growth and Unemployment: Towards a Theoretical Integration," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 419-455, July.
    48. Goerke, Laszlo, 1996. "Taxes on Payroll, Revenues and Profits in Three Models of Collective Bargaining," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(5), pages 549-565, November.
    49. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    50. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 753-779, May.
    51. Michael Bräuninger, 2000. "Wage Bargaining, Unemployment, and Growth," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 156(4), pages 646-646, December.
    52. Bean, Charles & Pissarides, Christopher, 1993. "Unemployment, consumption and growth," European Economic Review, Elsevier, vol. 37(4), pages 837-854, May.
    53. Caballero, Ricardo J., 1993. "Unemployment, consumption and growth : by Charles Bean and Chris Pissarides," European Economic Review, Elsevier, vol. 37(4), pages 855-859, May.
    54. Jochen Michaelis & Michael Pflüger, 2000. "The impact of tax reforms on unemployment in a SMOPEC," Journal of Economics, Springer, vol. 72(2), pages 175-201, June.
    55. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    56. Eriksson, Clas, 1997. "Is There a Trade-Off between Employment and Growth?," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 77-88, January.
    57. repec:eee:labchp:v:3:y:1999:i:pc:p:3029-3084 is not listed on IDEAS
    58. A. Lans Bovenberg & Frederick van der Ploeg, 2002. "Tax Reform, Structural Unemployment and the Environment," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 21, pages 379-396, Edward Elgar Publishing.
    59. Birk, Angela & Michaelis, Jochen, 2002. "Employment and growth effects of tax reforms in a growth-matching model," HWWA Discussion Papers 208, Hamburg Institute of International Economics (HWWA).
    60. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
    61. Kim, Se-Jik, 1998. "Growth effect of taxes in an endogenous growth model: to what extent do taxes affect economic growth?," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 125-158, September.
    62. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "Growth Effects of Income and Consumption Taxes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 721-744, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Karpavičius, Sigitas & Yu, Fan, 2016. "Should interest expenses be tax deductible?," Economic Modelling, Elsevier, vol. 54(C), pages 100-116.
    2. Jochen Michaelis & Alexander Spermann, 2009. "Geringqualifizierte Arbeit, Marktlöhne und Sozialpolitik: Konzepte für Deutschland," MAGKS Papers on Economics 200920, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Halit Yanikkaya & Taner Turan, 2020. "Tax Structure And Economic Growth: Do Differences In Income Level And Government Effectiveness Matter?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 217-237, March.
    4. Lars Kunze & Christiane Schuppert, 2009. "Financing Social Security by Taxing Capital Income – A Bad Idea?," Ruhr Economic Papers 0090, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    5. Iwona Mertin & Ognian N. Hishow, 2007. "Analysis of the success and failure in the labour markets of selected EU member-states: macroeconomic aspects," IWE Working Papers 176, Institute for World Economics - Centre for Economic and Regional Studies.
    6. Krajňák, Michal & Krzikallová, Kateřina & Friedrich, Václav, 2022. "Does political orientation affect economic indicators in the Czech Republic?," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1219-1231.
    7. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2016. "Factor income taxation, growth, and investment specific technological change," Economic Modelling, Elsevier, vol. 57(C), pages 133-152.
    8. Michaelis, Jochen, 2007. "Internationaler Handel," Volkswirtschaftliche Diskussionsbeiträge 91, University of Kassel, Faculty of Economics and Management.
    9. Lars Kunze & Christiane Schuppert, 2010. "Financing social security by taxing capital income: A bad idea?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(3), pages 243-262, September.
    10. Eckey, Hans-Friedrich & Kosfeld, Reinhold & Türck, Matthias, 2007. "Anmerkung zur Identifikation von Förderregionen in der Gemeinschaftsaufgabe," Volkswirtschaftliche Diskussionsbeiträge 90, University of Kassel, Faculty of Economics and Management.
    11. Schmidt, André, 2007. "Per-se-Rule, Rule of Reason und der "more economic approach"," Volkswirtschaftliche Diskussionsbeiträge 92, University of Kassel, Faculty of Economics and Management.
    12. Sèna Kimm Gnangnon & Jean-François Brun, 2020. "Tax reform and fiscal space in developing countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 237-265, June.
    13. Reinhold Kosfeld & Hans-Friedrich Eckey & Jorgen Lauridsen, 2008. "Disparities in Prices and Income across German NUTS 3 Regions," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 54(2), pages 123-141.
    14. Jerger, Jürgen & Michaelis, Jochen, 2007. "Warum beobachten wir so wenig Arbeitnehmer-Gewinnbeteiligung?," Volkswirtschaftliche Diskussionsbeiträge 94, University of Kassel, Faculty of Economics and Management.
    15. Halit Yanikkaya & Taner Turan, 2018. "Tax Structure And Economic Growth: Do Differences In Income Level And Government Effectiveness Matter?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 217-237, May.
    16. repec:zbw:rwirep:0090 is not listed on IDEAS
    17. Zuo, Shengqiang & Wu, Bangzheng & Feng, Jun, 2023. "Does government reduction of the corporate income tax rate increase employment? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 365-372.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:got:cegedp:29 is not listed on IDEAS
    2. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    3. Etro, Federico, 2017. "Research in economics and macroeconomics," Research in Economics, Elsevier, vol. 71(3), pages 373-383.
    4. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 65-116, National Bureau of Economic Research, Inc.
    5. Corsetti, Giancarlo, 2007. "New Open Economy Macroeconomics," CEPR Discussion Papers 6578, C.E.P.R. Discussion Papers.
    6. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
    7. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
    8. Enrique Martínez García, 2008. "Globalization and monetary policy: an introduction," Globalization Institute Working Papers 11, Federal Reserve Bank of Dallas.
    9. Liu, Zheng & Pappa, Evi, 2008. "Gains from international monetary policy coordination: Does it pay to be different?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2085-2117, July.
    10. Liu, Zheng & Pappa, Evi, 2005. "Gains from coordination in a multi-sector open economy : does it pay to be different?," LSE Research Online Documents on Economics 525, London School of Economics and Political Science, LSE Library.
    11. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    12. Chang, Juin-jen & Shaw, Ming-fu & Lai, Ching-chong, 2007. "A "Managerial" trade union and economic growth," European Economic Review, Elsevier, vol. 51(2), pages 365-384, February.
    13. Cooley, Thomas & Quadrini, Vincenzo, 2002. "Common Currencies versus Monetary Independence," CEPR Discussion Papers 3436, C.E.P.R. Discussion Papers.
    14. Alan Sutherland, 2002. "International monetary policy coordination and financial market integration," International Finance Discussion Papers 751, Board of Governors of the Federal Reserve System (U.S.).
    15. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary policy in open economies: the role of reference currency in vertical production and trade," CEMA Working Papers 586, China Economics and Management Academy, Central University of Finance and Economics.
    16. Kevin X. D. Huang & Zheng Liu, 2005. "Vertical production and trade interdependence and welfare," Working Papers 05-15, Federal Reserve Bank of Philadelphia.
    17. David Bowman & Brian M. Doyle, 2003. "New Keynesian, open-economy models and their implications for monetary policy," International Finance Discussion Papers 762, Board of Governors of the Federal Reserve System (U.S.).
    18. Berger, Wolfram, 2008. "Monetary policy rules and the exchange rate," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1064-1084, September.
    19. Sutherland, Alan, 2006. "The expenditure switching effect, welfare and monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1159-1182, July.
    20. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    21. Huang, Kevin X.D. & Liu, Zheng, 2006. "Sellers' local currency pricing or buyers' local currency pricing: does it matter for international welfare analysis?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1183-1213, July.

    More about this item

    Keywords

    Public Economics;

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:hwwadp:26275. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/hwwaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.