Taxes, Subsidies, and Employment

Abstract

It is asserted that tax subsidies in favor of the labor-intensive commodity will increase employment as will tax-subsidy policies against capital and in favor of labor. A two sector model that provides two approaches to increasing the total volume of employment when scarce capital stock is fully employed is used to examine this assertion. The main thrust of the argument is that an important effect of factor taxation in an industry is to lower the rate of profit in that industry. This produces intersectoral effects that may have significant effects for total employment. The direction of the intersectoral effects is vital for the design of an employment policy consistent with other government policy objectives. The analysis suggests some general rules. For example, factor price intervention is less ambiguous when generally applied to all sectors. Further, when selectivity is needed, the employment promotion impact of fiscal intervention is greatest when the labor subsidies are given to the labor-intensive industries and the capital taxation imposed on the capital-intensive industries.