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Striking a balance: optimal tax policy with labor market duality

Author

Listed:
  • Gilbert Mbara

    (Group for Research in Applied Economics (GRAPE))

  • Ryszard Kokoszczynski

    (University of Warsaw
    Narodowy Bank Polski)

  • Joanna Tyrowicz

    (Group for Research in Applied Economics (GRAPE)
    University of Warsaw)

Abstract

We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers "secondary contracts". When calibrated, the model yields estimates of secondary labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.

Suggested Citation

  • Gilbert Mbara & Ryszard Kokoszczynski & Joanna Tyrowicz, 2017. "Striking a balance: optimal tax policy with labor market duality," GRAPE Working Papers 16, GRAPE Group for Research in Applied Economics.
  • Handle: RePEc:fme:wpaper:16
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    References listed on IDEAS

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    More about this item

    Keywords

    Laffer curve; tax evasion; labor market duality;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions

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