Optimal Taxation in Search Equilibrium with Home Production

Engström, Per; Holmlund, Bertil; Kolm, Ann-Sofie

Optimal Taxation in Search Equilibrium with Home Production

CESifo Working Paper Series No. 613; Uppsala University Working Paper No. 2001:19

40 Pages Posted: 1 Nov 2001

See all articles by Per Engström

Per Engström

Uppsala University - Department of Economics

Bertil Holmlund

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Ann-Sofie Kolm

Uppsala University; Institute for Labour Market Policy Evaluation

Date Written: December 2001

Abstract

The paper develops a two-sector general equilibrium search model where "goods" are produced exclusively in the market and "services" are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving. Numerical calibrations of the model suggest that the welfare gains from tax differentiation are large if the government absorbs a substantial fraction of GDP.

Keywords: Taxation, Home Production, Search, Unemployment

JEL Classification: H21, J22, J41, J64

Suggested Citation: Suggested Citation

Engström, Per and Holmlund, Bertil and Kolm, Ann-Sofie, Optimal Taxation in Search Equilibrium with Home Production (December 2001). CESifo Working Paper Series No. 613; Uppsala University Working Paper No. 2001:19. Available at SSRN: https://ssrn.com/abstract=288212