Labor tax reform, unemployment, and search

Ben J. Heijdra, Jenny E. Ligthart*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

8 Citations (Scopus)
37 Downloads (Pure)

Abstract

A key obstacle to reducing payroll taxes in many industrialized and transition countries is the direct revenue loss to the government that it implies. This paper studies a simple and practical labor tax reform of reducing a payroll tax and increasing a progressive wage tax that keeps the marginal tax wedge unchanged. Such a strategy increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. Moreover, welfare rises if workers' bargaining power is sufficiently large to exceed a critical value determined by the second-best Hosios condition.

Original languageEnglish
Pages (from-to)82-104
Number of pages23
JournalInternational Tax and Public Finance
Volume16
Issue number1
DOIs
Publication statusPublished - Feb-2009

Keywords

  • Labor tax reform
  • Equilibrium unemployment
  • Invariance of incidence proposition
  • Payroll taxes
  • Search and matching model
  • REAL BUSINESS-CYCLE
  • MARKET SEARCH
  • TAXATION
  • WAGE
  • EQUIVALENCE
  • BENEFITS
  • MODELS

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