Tax Wedge Research Articles

Analysis of the effects of tax wedge on female and male employment in OECD countries by panel data method*

Analysis of the effects of tax wedge on female and male employment in OECD countries by panel data method*

The Embodiment Controversy: On the Policy Implications of Vintage Capital Models

AbstractWe explore the long‐run impact of policy on the level of economic activity through changes in the vintage distribution of capital, in a model where different vintages coexist in production. Because firms can choose the vintage of capital in which they invest, investment subsidies do not affect the vintage structure of capital. In contrast, vintage‐specific taxes or subsidies that target the newest vintages of capital can significantly affect output and welfare in the long run, mainly downward. Transition dynamics are rapid, so that steady‐state comparisons give an accurate picture of the welfare impact of vintage tax wedges.

The effect of labor market institutions and macroeconomic variables on aggregate unemployment in 1990–2019: Evidence from 22 European countries

AbstractThis paper investigates the long-run effect of a wide set of labor market institutions (LMIs) and macroeconomic variables on aggregate unemployment for a panel of 22 European countries over the period 1990–2019. First-difference feasible generalized least squares model, Prais-Winsten regression with panel-corrected standard errors, two-step generalized method of moments estimation of the fixed effects, and fixed-effects regression with Driscoll and Kraay standard errors are estimated. The results suggest that employment protection legislation, wage bargaining coordination and centralization, minimum wage, and immigration inflows are significantly and negatively associated with the aggregate unemployment rate. Conversely, union density, product market regulation (PMR), and tax wedge have a positive and significant correlation with unemployment rate. The impact of corporate tax rate and government size is mostly positive. Moreover, the interaction between LMIs does matter and may sometimes change the interpretation of some reforms taken in isolation. Stronger wage-setting institutions may offset the negative impact of PMR and the tax wedge. Macroeconomic variables are generally consistent with the major literature and do not change LMIs interpretation. Among macroeconomic factors, capital accumulation plays the most important role in reducing the unemployment rate. Finally, my findings suggest the implementation of economic policies consistent with Keynesian theory and all those economists—such as Solow (1990)—who look at the labor market as a social institution.

Relacija poreskog klina i stope zaposlenosti - slučaj OECD zemalja

The paper investigates the relationship between tax wedge and employment rate in thirty-six OECD countries for the period 2000-2020. The aim of this paper is to identify how tax wedge indicators affect the employment level in these economies. The empirical research includes correlation analysis and panel regression to determine character and intensity of nexus among observed variables. The results of Hausman represent that a random effects model is adequate for estimating the effect of tax wedge on the employment rate in selected countries. The model results show a negative correlation between these variables, as well as, that tax wedge indicators have a negative impact on the employment rate in OECD countries for the observed period. The empirical findings manifest that a 1% increase in the average tax wedge leads to a lower employment rate of 0.33% in OECD economies.

The Export-Based Variabilities in Oecd And Effects Of The Tax Burden Psychology On Export Limits

It is observed that different levels of development in OECD countries affect the variability in export limits at different levels. In this study, we aimed to deal with the variability in export limits, as the average of OECD countries, on the basis of both economic growth trends and investments in the production of exported goods. We have seen that all kinds of variability in investments have a positive correlation effect on national income together with the variable effect on export limits. This process of structural change has been involved in different development levels in OECD countries, and we have found that developed industrial countries have different effects on export limits, especially. On the other hand, it appears that these variables in question have different effects on public expenditures related to different investment margins. It turns out that the tax burden phenomenon, which has an important place in the cost of export-oriented investments, and the labor costs on the employer, as the tax wedge, also create significant variable effects. In this context, the significance of the proportional changes in the increase in the values of each economic growth within a more variable investment spectrum with different characteristics in OECD countries is also important. Differences in export limits as country averages are affected by different investment values, as well as directly under the positive effect of the national income effect, it also creates an accelerating effect on the investments in export goods. In this respect, it is understood that the increase in exports in each value in OECD countries creates a mutual correlation with different macro variables and different impact levels of countries.

Testing Unemployment Hysteresis with Multi-Factor Panel Unit Root: Evidence from OECD Countries

Hysteresis is a dominant feature of unemployment in numerous countries. According to the hysteresis hypothesis, it is a well-known fact that high unemployment may persist and remain an economic threat in the long run if policy measures are not taken. In this study, it is tested whether the unemployment rates for 10 selected countries of the Organisation for Economic Co-operation and Development (OECD) (Belgium, Canada, Czech Republic, Estonia, France, Japan, Netherlands, Spain, Britain and the USA) contain unit root or not, in other words, whether the hysteresis effect is valid for these countries. For this purpose, this study utilises the concept of the multi-factor panel unit root test proposed by Pesaran, Smith and Yamagata. This method measures cross-section dependence through factors. The test analyses whether the unit root is valid or not, using information about a sufficient number of additional explanatory variables. The characteristic of these additional variables is that they must share a common factor with the variable whose stationarity is tested. It is accepted that this common factor causes cross-sectional dependence. We have taken tax wedge, trade union density and minimum wage as factors that cause cross-sectional dependency and affect unemployment hysteresis. In this test developed by the authors, in the case of a multi-factor error structure, the test procedure is completed by using the information contained in 3 additional variables. The study explores not only the validity of unemployment hysteresis but also the factors that affect the rigidity of the unemployment rate. However, the research was unable to encompass the entire OECD countries and all times because of the lack of data. The results showed that the hysteresis is valid for 10 selected OECD countries.

Social security contributions distribution and economic activity

This paper studies the macroeconomic and welfare implications of the distribution of the social security tax between employees and employers using a general equilibrium framework. We calibrate a dynamic general equilibrium model for the average of OECD countries and find that increasing the share of social security contributions paid by employers has a positive effect on economic activity and welfare. Whereas raising the employer’s share increases the labor cost for firms and reduces the equilibrium gross wage, conversely, workers’ net labor income increases, increasing employment, output, and welfare. The response of the economy to the change in the distribution of social security contributions between employees and employers depends on how the total labor tax wedge changes, which is also affected by the labor income tax and the consumption tax, as distortionary effects from one tax are not independent from the other taxes driving wages’ purchasing power.

Demand-side or supply-side stabilisation policies in a small euro area economy: a case study for Slovenia

In this paper we analyse the effectiveness of demand- and supply-side fiscal policies in the small open economy of Slovenia. Simulating the SLOPOL10 model, an econometric model of the Slovenian economy, we analyse the effectiveness of various categories of public spending and taxes during the period 2020 to 2030, assuming that no crisis occurs. Our simulations show that those public spending measures that entail both demand- and supply-side effects are more effective at stimulating real GDP and increasing employment than pure demand-side measures. This is due to the fact that supply-side measures also increase potential and not only actual GDP. Measures which foster research and development and those which improve the education level of the labour force are particularly effective in this respect. Employment can also be stimulated effectively by cutting the income tax rate and the social security contribution rate, i.e. by reducing the tax wedge on labour income, which positively affects Slovenia’s international competitiveness. Successful stabilisation policies should thus contain a supply-side component in addition to a demand-side component. We also provide a first simulation of potential effects of the Covid-19 crisis on the Slovenian economy, which is modelled as a combined demand and supply shock.

Optimal Redistributive Policy Under Disaster Risk: Self-Protection and Social Mitigation

This paper examines the optimal mixed taxation of polluting goods and subsidies for self-protection under nonlinear income tax. The novel contribution of this paper is to take disaster risk into account, the probability which is determined by the total amount of polluting goods consumed by all individuals. I derive the properties of optimal allocations in the first and second best scenarios, and the tax wedges. In addition, I obtain the optimal tax scheme in cases where the government cannot observe each individual's consumption of polluting goods. The optimal tax rate on polluting goods includes both the Pigouvian term and the screening term, which is not shown in other tax schedules.

The Value of Employer-Sponsored Health Insurance

Based on published estimates of its price elasticity of demand and of tax wedges, as well as the method of revealed preference, I estimate that the annual social value of ESI is about $1.5 trillion beyond what policyholders, their employers, and taxpayers pay for it. The private component of that value, which in some respects is the other side of “job lock,” derives in part from group plans, with the group determined by many characteristics other than the demand for healthcare. With voluntary groups formed this way, adverse risk selection is reduced, the groups can be effective at obtaining substantial discounts and rebates for their members, and division of labor employed in shopping for health providers. ESI is also a mechanism for employers to act on their incentives for a healthy and productive workforce. External effects include tax externalities (in both directions), encouraging work, and easing government expenditure obligations by helping to prevent people from going without health insurance.

Tax Wedge Phenomenon and Its Possible Analytical Impacts on the Investments in OECD

In this study, we aim to put forth the tax wedge case that affects both the labor costs and the proposed investment level that also means economic growth through the public decision-making process in an analytical framework. Given that the tax wedge is the proportional difference between the tax paid by a taxpayer worker and the cost to the employer, it is understood that the effect levels also create different differential effects. In this context, it is necessary to question the analytical relationship between the tax wedge and the tax burden. The relationship between this systematic-analytical structural relationship and economic growth also means examining possible externalities in their impact levels. It seems that this effect on OECD countries reveals significant differences according to the development levels of the states. Besides, the breaking point where these differences are substantial in terms of our determinations is the tax burden of nations, and it is understood that the proportional changes in the tax wedge are directly affected by this financial fact. In addition, the fact that OECD countries also have different tax burdens, the differences between tax systems in practice also differentiate the analytical relationship between the tax wedge and tax burdens. However, the measures related to the deviations of global financial and economic relations between OECD countries reveal that possible analytical differences between tax wedge and tax burdens have tried to be overcome via the fundamental systemic financial restructures in recent years.

Taxation, credit frictions and the cyclical behavior of the labor wedge

Labor-income and consumption taxes are often referred to as the primary causes of the labor wedge and differences in hours worked across countries. While this can be potentially true in the long run, its premise for explaining the cyclical behavior of the labor wedge is questionable. Using US data over 1955–2019, this paper first studies whether taxation explains the cyclical behavior of the labor wedge. It is shown that the tax wedge, which combines both types of taxes, fails in accounting for the countercyclicality of the labor wedge. I then study other factors that may raise the labor wedge during recessions, such as credit frictions on the firms’ side and price markups, and find that credit frictions are the primary reasons for this behavior. The empirical findings are consistent with the model-based results; the model with credit frictions successfully generates a countercyclical behavior of the labor wedge, whereas the model without credit frictions does not.

Introduction

Introduction

Parity funding of health care contributions in Germany: A DSGE perspective

AbstractGermany reintroduced parity funding of the statutory health insurance scheme in January 2019 by lowering the contribution rates for employees and raising those for employers, leaving the total rate constant. This reduces the tax wedge between total labour costs and net wages. After a small demand impulse on impact, followed by a small downturn in the first two years after implementation, an estimated New Keynesian DSGE model indicates small positive long-run output and employment effects. However, the reduced tax wedge leads to lower public revenues. Aggregate macroeconomic and welfare effects will depend on how the government compensates for these revenue losses.

Capital income taxation with housing

This paper quantitatively investigates capital income taxation in the general-equilibrium overlapping generations model with household heterogeneity and housing. Housing tax policy is found to affect how capital income should be taxed, due to substitution between housing and non-housing capital. Given the existing U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero (1%), contrary to the high optimal capital income tax rate found with overlapping generations models without housing (31%). A low capital income tax rate improves welfare by narrowing a tax wedge between housing and non-housing capital; the narrowed tax wedge indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects over-investment to housing. Naturally, when the preferential tax treatment for owner-occupied housing is eliminated, a high capital income tax rate improves welfare as in the model without housing.

The Beveridge curve in the OECD before and after the great recession

This paper analyses the Beveridge curve across twelve OECD countries from 1985 to 2013. Besides allowing for some customary labour-market institutions, we assess the role of technological progress and globalisation, as well as of the current recession, on the curve. Significant institutional variables include unemployment benefits, the tax wedge, minimum wages, and, to a lesser extent, employment protection legislation (the latter improving the unemployment-vacancies trade-off). Technological progress has a complex impact. R&D intensity worsens matching efficiency, producing evidence in support of a creative destruction effect, while an index of total factor productivity has the opposite effect. Unlike in previous work, we find a favourable impact of globalisation. The curve parameters are stable throughout the 2008–2013 period, once we allow for country-specific shifts in the curve coincidental with the Great Recession. On the other hand, there is no common shift of the curve that can be associated with the Great Recession.

The Policy Drivers of Self-Employment: New Evidence from Europe

Using cross-country time series panel regressions for the last two decades, this paper seeks to identify the main policy and institutional factors that explain the share of self-employment across European countries. It looks at the aggregate share of self-employed as well as its breakdown by age, skill and gender. The generosity of unemployment benefits, and to a lesser extent, spending on active labour market policies appear to be robust determinants of the long-term share of self-employed in European countries. No significant relation could be identified between the stringency of employment protection and aggregate self-employment. However, there are significant, and oppositely signed, impacts on high- and low-skilled self-employed separately. Both the tax wedge and the minimum wage appear to be related positively to the share of self-employed in the long term, but the relation holds for some categories of workers only.

Capital Income Taxation with Portfolio Choice

This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various households hold portfolios with a starkly different risk levels. In particular, poor households primarily save in safe assets, while rich households often invest a substantially higher share of their wealth in (risky) equity. At the same time, equity and safe assets are often taxed at different rates in many tax codes. This is primarily because investments in equity (which are relatively riskier) are taxed both as corporate and personal income, unlike debt, which is tax deductible for corporations. This paper firstly builds a simple theoretical two-period model which shows that the optimal tax wedge between risky and safe assets is increasing in the underlying wealth inequality. Furthermore, I build a quantitative model with a continuum of heterogeneous agents, parsimonious life-cycle, borrowing constraint, aggregate shocks and uninsurable idiosyncratic shocks, in which the government raises revenue by using linear taxes on risky and safe assets. Simulations of quantitative models shows that elimination of differential asset taxation leads to a welfare loss equivalent to a 0.3% permanent reduction in consumption. I find that the optimal tax wedge between taxes on equity and debt is higher than the one in the U.S. tax code.

Complementarity Between Low- and High-Skilled Workers and the Employment Impact of Tax versus Human Capital Policies

The present paper analyses theoretically the impact of substitutability and complementarity between labour market segments on the efficiency of policies tackling low-skilled unemployment. Based on a search and matching model with multiple segments interacting through the production function, it is shown that the efficiency of cost policies - decreasing payroll taxes on low-skill segments - increases with the segments' substitutability. Reducing the relative cost of low-skill labour - through tax wedge decrease - induces labour demand increase if low-skill labour is substitute to other production factors. The efficiency of productivity policies - upgrading workers from lower to higher-skill segments - increases with their complementarity. Enhancing human capital allows increasing production - constrained by the scarcity of high-skill labour - hence increases low-skill labour demand if factors are complements. Consequently, variations of the efficiency of both policies may derive from the technological change, modifying the complementarity between segments.

Stabilisation policies in a small Euro area economy: taxes or expenditures A case study for Slovenia

In this paper, we investigate how effective stabilisation policies can be in Slovenia. In particular, we analyse whether policy or expenditure policy has stronger multiplier effects. Slovenia is an interesting case because it is a small open economy in Central Europe that was already in the Euro area before the Great Recession. Using the SLOPOL10 model, an econometric model of the Slovenian economy, we show that those public spending measures that entail both demand and supply side effects are more effective at stimulating real GDP than pure demand side measures. Measures that improve the education level of the labour force are very effective at stimulating potential GDP. Employment can be most effectively stimulated by reducing the tax wedge on labour income, thereby positively affecting Slovenia's international competitiveness. However, simulations show that fiscal policy measures can only mitigate but not undo the adverse effects of a crisis like the Great Recession.