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Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity

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  • Etienne Lehmann
  • Claudio Lucifora
  • Simone Moriconi
  • Bruno Van der Linden

Abstract

This paper argues that, for a given overall level of labour income taxation, a more progressive tax schedule reduces the unemployment rate and increases the employment rate. From a theoretical point of view, higher progressivity induces a wage-moderation effect and increases overall employment since employment of low-paid workers is more responsive. We test these theoretical predictions on a panel of 21 OECD countries over 1998-2008. Controlling for the burden of taxation at the average wage, we show that a more progressive taxation reduces the unemployment rate and increases the employment rate. These findings are confirmed when we account for the potential endogeneity of both average taxation and progressivity. Overall our results suggest that policy-makers should not only focus on the detrimental effects of tax progressivity on in-work effort.

Suggested Citation

  • Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2013. "Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity," CESifo Working Paper Series 4348, CESifo.
  • Handle: RePEc:ces:ceswps:_4348
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    Cited by:

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    7. Lisa Gianmoena & Vicente Rios, 2018. "The Determinants of Resilience in European Regions During the Great Recession: a Bayesian Model Averaging Approach," Discussion Papers 2018/235, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    8. Albert Jan Hummel, 2021. "Unemployment and Tax Design," CESifo Working Paper Series 9177, CESifo.
    9. Masuch, Klaus & Anderton, Robert & Setzer, Ralph & Benalal, Nicholai, 2018. "Structural policies in the euro area," Occasional Paper Series 210, European Central Bank.
    10. Albert Jan Hummel, 2021. "Unemployment and tax design," Tinbergen Institute Discussion Papers 21-061/VI, Tinbergen Institute.
    11. European Commission, 2018. "Tax Policies in the European Union: 2018 Survey," Taxation Survey 2018, Directorate General Taxation and Customs Union, European Commission.

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    More about this item

    Keywords

    wage moderation; employment; taxation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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