Taxation in a two-sided search model

This paper analyzes the effects of wage and profit taxation in a simple search and bargaining model. Wage tax effects depend upon the level of unemployment benefits. If unemployment benefits are less than search costs or if benefits are taxed as income, then a wage tax decreases unemployment. It als...

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Bibliographic Details
Published in:Journal of public economics 1994-07, Vol.54 (3), p.423-435
Main Author: Smith, Eric
Format: Article
Language:English
Subjects:
Economic models
Economic theory
Employment
Public economics
Taxation
Unemployment benefits
Wage rates
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Summary:This paper analyzes the effects of wage and profit taxation in a simple search and bargaining model. Wage tax effects depend upon the level of unemployment benefits. If unemployment benefits are less than search costs or if benefits are taxed as income, then a wage tax decreases unemployment. It also decreases the wage, thereby overshifting the tax burden. Profit tax effects depend upon job entry. In the short run with a fixed number of jobs (filled jobs plus vacancies), a profit tax decreases unemployment. It also raises the wage, again overshifting the tax. In the long run, the converse holds.
ISSN:0047-2727
1879-2316
DOI:10.1016/0047-2727(94)90044-2