Labor tax reform, unemployment, and search

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 ta...

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Bibliographic Details
Published in:International tax and public finance 2009-02, Vol.16 (1), p.82-104
Main Authors: Heijdra, Ben J., Ligthart, Jenny E.
Format: Article
Language:English
Subjects:
Bargaining
Business Taxation/Tax Law
Competition
Economic models
Economics
Economics and Finance
Employees
Employers
Employment
Equilibrium
Equilibrium unemployment
Invariance of incidence proposition
J680
Labor market
Labor tax reform
Labour
Payroll taxes
Public Finance
Search and matching model
Studies
Tax rates
Tax reform
Unemployment
Wages
Wages & salaries
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Summary: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.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-007-9056-6