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Tax Reforms in Search-and-Matching Models with Heterogeneous Agents

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  • Wei Jiang

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Abstract

Using a Mortensen-Pissarides search-and-matching framework, this paper investigates the importance of search frictions in determining the welfare and distributional effects of tax reforms that re-allocate the tax burden from capital to labour income. Calibrating the model to the UK economy, we find that the tax reforms are Pareto improving but increase inequality in the long run, despite welfare losses for at least one segment of the population in the short run. The results are robust to the variations in the relative bargaining power of workers and different specifications of unemployment benefit. But the welfare gains are higher for all agents if the relative bargaining power of workers is reduced or we assume that unemployment benefit depends on past wages.

Suggested Citation

  • Wei Jiang, 2014. "Tax Reforms in Search-and-Matching Models with Heterogeneous Agents," Studies in Economics 1414, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1414
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    References listed on IDEAS

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    Cited by:

    1. Jian Xin Heng & Benoit Julien & John Kennes & Ian King, 2016. "Job Qualities, Search Unemployment, and Public Policy," Discussion Papers Series 570, School of Economics, University of Queensland, Australia.

    More about this item

    Keywords

    search frictions; agent heterogeneity; unemployment benefits; tax reforms;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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