Payroll Taxes and Vat in a Labor-Turnover Model of the 'Natural Rate'
INTERNATIONAL TAX AND PUBLIC FINANCE, Vol. 3, No. 3, 1996
Posted: 18 Apr 1998
We explore the effects of the tax structure in our version of the labor-turnover model of unemployment. We show that for a closed economy, a shift to increased payroll taxation offset by a lighter VAT rate raises the natural rate of unemployment. However, for a small open economy whose interest rate is given by the world rate, the tax shift is neutral for employment. Extending the analysis to a two- country world exhibiting free international capital mobility, we show that a tax shift in either one of the countries raises the natural rate in both economies.
JEL Classification: E24, E62, H22
Suggested Citation: Suggested Citation