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Optimal tax progressivity in unionised labour markets: Simulation results for Germany

  • Boeters, Stefan

Changing the income tax progressivity in labour markets with collective wage bargaining generates a trade-off. On the one hand, higher progressivity distorts individual labour supply decisions at the hours-of-work margin, on the other hand, it reduces unemployment by exerting downward pressure on wages. This trade-off is quantitatively assessed using a numerical model for Germany. The model combines a microsimulation module, which captures the labour-supply decisions of approximately 4600 individual households, and a macro (computable general equilibrium) module, which features collective wage bargaining and involuntary unemployment. In the simulations carried out using this model, the optimal degree of tax progressivity turns out to be higher than the one in the actual German tax schedule. The optimum is located at marginal tax rates that are 6 percentage points higher than the actual rates (combined with a transfer that balances the public budget). The welfare gain from such a reform is modest, however. It amounts to no more than two euros per person per month.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 10-035.

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Date of creation: 2010
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Handle: RePEc:zbw:zewdip:10035
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  8. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
  9. Stefan Boeters & Michael Feil, 2009. "Heterogeneous Labour Markets in a Microsimulation–AGE Model: Application to Welfare Reform in Germany," Computational Economics, Society for Computational Economics, vol. 33(4), pages 305-335, May.
  10. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
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  12. Ericson, Peter & Flood, Lennart, 2009. "A Microsimulation Approach to an Optimal Swedish Income Tax," IZA Discussion Papers 4379, Institute for the Study of Labor (IZA).
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  20. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2006. "Analysing welfare reform in a microsimulation-AGE model: the value of disaggregation," ZEW Discussion Papers 06-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  24. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
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  26. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
  27. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
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