Abstract
An overlapping generations model of a small open economy is used to explore several policy options aimed at reducing the burden of income taxes and pay-as-you-go (PAYG) contributions on labor income so as to improve the incentives to supply labor. Including the return of funded collective (FC) pension plans in the tax base turns out to be counterproductive. Cutting PAYG benefits, in contrast, succeeds in improving efficiency in general and labor-market incentives in particular. Under specific variants of the FC plan, reducing PAYG benefits even proves to be Pareto-welfare improving.
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