Unions, Labour supply and Structure of Taxation: Equal Tax Bases
This paper investigates the employment effects of changes in the structure of taxation and in the tax progression. The contribution is to add endogenous determination of working hours into a union wage setting model. Thus employment effects of any changes in taxation are derived as a labour supply response of workers to tax-induced changes in equilibrium wage. The main findings are the following: i) When hours and heads are perfect substitutes in production, introducing income tax progression at the margin decreases the gross wage rate. If, in addition, leisure is a normal good and wage elasticity of labour supply positive, then hours of work decreases and employment is boosted. ii) Restructuring labour taxation away from payroll tax leaves the gross wage rate, hours of work and employment unchanged, when the income tax base and the payroll tax base are equal. This equality holds when there is a given exemption from income taxes.
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