Interwar U.K. Unemployment: The Benjamin and Kochin Hypothesis or the Legacy of 'Just' Taxes?

FRB of Atlanta Working Paper No. 2006-4

17 Pages Posted: 18 May 2006

See all articles by James M. Nason

James M. Nason

North Carolina State University - Department of Economics

Shaun P. Vahey

Reserve Bank of New Zealand

Date Written: May 2006

Abstract

Benjamin and Kochin (1979, Journal of Political Economy) present regression estimates to support their hypothesis that larger unemployment benefits increased U.K. unemployment post-World War I (WWI). The Benjamin-Kochin (BK) regression is easy to replicate. When the replication is widened to include income tax rates and WWI observations using Bayesian Monte Carlo methods, the evidence moves against the BK hypothesis and in favor of regressions that include the capital income tax rate. We explain these results with Daunton (2002, Just Taxes). He argues that U.K. tax rates were set during WWI and the interwar period to achieve an equitable, or just, mix of taxes and debt. Neoclassical theory suggests that capital income tax rates fluctuations created inefficient factor input allocations that drove up interwar U.K. unemployment.

Keywords: U.K. interwar unemployment, replacement ratio, capital income tax rate, Markov chain Monte Carlo

JEL Classification: E32, E62, N14, N34, N44

Suggested Citation

Nason, James M. and Vahey, Shaun P., Interwar U.K. Unemployment: The Benjamin and Kochin Hypothesis or the Legacy of 'Just' Taxes? (May 2006). FRB of Atlanta Working Paper No. 2006-4. Available at SSRN: https://ssrn.com/abstract=903152 or http://dx.doi.org/10.2139/ssrn.903152

James M. Nason (Contact Author)

North Carolina State University - Department of Economics ( email )

Campus Box 8110
NC State University
Raleigh, NC 27695-8110
United States
(919) 513-2884 (Phone)
(919) 515-5613 (Fax)

Shaun P. Vahey

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

HOME PAGE: http://www.rbnz.govt.nz/research/profiles/1863220.html

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