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Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining?

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  • Koskela, Erkki
  • Schöb, Ronnie

Abstract

Using the Nash bargaining approach to wage negotiations this paper shows that conventional wisdom, according to which the total tax wedge is the sum of wage and payroll taxes, is valid for equal tax bases, e.g., when the tax exemption takes the form of a tax credit. However, the equivalence result ceases to hold when the tax bases are unequal due to tax allowances. In this case a revenue-neutral restructuring of labour taxes toward a narrower tax base decreases the gross wage and is thus good for employment.

Suggested Citation

  • Koskela, Erkki & Schöb, Ronnie, 1999. "Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining?," Discussion Papers 203, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:203
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    File URL: https://www.doria.fi/handle/10024/148374
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    References listed on IDEAS

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    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Holm, Pasi & Honkapohja, Seppo & Koskela, Erkki, 1994. "A monopoly-union model of wage determination with capital and taxes: An empirical application to the Finnish manufacturing," European Economic Review, Elsevier, vol. 38(2), pages 285-303, February.
    3. 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.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Tax wedge; payroll tax; wage tax; wage bargaining; non-equivalence; Labour market; Työmarkkinat; Taxation; Verotus; Effectiveness of public services; Julkisten palvelujen vaikuttavuus; H200 - Taxation; Subsidies; and Revenue: General; J510 - Trade Unions: Objectives; Structure; and Effects;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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