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Taxes and employment - is there a Scandinavia puzzle ?

  • Torben M. Andersen
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    Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation despite high tax rates and a generous social safety net.This paper considers the experience of European countries and Scandinavia compared to the US and asks whether Scandinavian countries are outliers. First, it is argued that the simple "tax argument" does not capture the European experience since labour force participation for some age groups is at the same or a higher level than the US. Second, it is argued that even though the social safety net is generous in Scandinavian countries, it is also very employment conditional. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. The design of the social safety net is therefore important in accounting for the Scandinavian experience.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication13935_en.pdf
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    Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 359.

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    Length: 333 pages
    Date of creation: Feb 2009
    Date of revision:
    Handle: RePEc:euf:ecopap:0359
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    1. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
    2. Andersen, Torben M. & Holmström, Bengt & Honkapohja, Seppo & Korkman, Sixten & Söderström Hans Tson, & Vartiainen, Juhana, . "The Nordic Model. Embracing globalization and sharing risks," ETLA B, The Research Institute of the Finnish Economy, number 232.
    3. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U. S. and Europe: Why so Different?," Harvard Institute of Economic Research Working Papers 2068, Harvard - Institute of Economic Research.
    4. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997. "Social Norms and Economic Incentives in the Welfare State," Working Paper Series 476, Research Institute of Industrial Economics.
    5. Chetty, Nadarajan, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," Scholarly Articles 9748527, Harvard University Department of Economics.
    6. Assar Lindbeck & Sten Nyberg & Jörgen W. Weibull, 2003. "Social Norms and Welfare State Dynamics," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 533-542, 04/05.
    7. Michiel Evers & Ruud A. De Mooij & Daniel J. Van Vuuren, 2005. "What Explains the Variation in Estimates of Labour Supply Elasticities?," CESifo Working Paper Series 1633, CESifo Group Munich.
    8. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
    9. Pedersen, Peder J. & Smith, Nina, 2002. "Unemployment Traps: Do Financial Dis-incentives matter?," CLS Working Papers 01-1, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
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