Tax Progression, Structure of Labour Taxation and Employment

Posted: 28 Jun 1998

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Pasi Holm

University of Helsinki

Date Written: November 1995

Abstract

According to a widely held popular belief, a pure increase in tax progression decreases work effort, increases wages and is thus bad for employment under competitive labour markets. This paper studies the effects of labour taxes in a general equilibrium model of two countries with monopoly unions, where wages are not determined by equality of the demand for and supply of labour. It is shown that increased domestic tax progression, which keeps government tax revenue unchanged, decreases both the domestic and foreign wages and thus raises employment in both countries. Moreover, a revenue neutral restructuring of labour taxation from employers to workers in the domestic country is good for employment in both countries, when the income tax base is smaller than payroll tax base. But when the income tax base is equal to the payroll tax base, a revenue neutral restructuring of labour taxation has no employment effect in either country.

JEL Classification: H22, J51, J69

Suggested Citation

Koskela, Erkki and Holm, Pasi, Tax Progression, Structure of Labour Taxation and Employment (November 1995 ). Available at SSRN: https://ssrn.com/abstract=3012

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pasi Holm

University of Helsinki

University of Helsinki
Helsinki, FIN-00014
Finland

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