Tax Differentiation, Search Unemployment, and Home Production

Posted: 29 Feb 2008

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: October 2005

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 under certain conditions. Numerical calibrations of the model suggest that the welfare gains from tax differentiation may be large.

JEL Classification: H21, J22, J41, J64

Suggested Citation

Engström, Per and Holmlund, Bertil and Kolm, Ann-Sofie, Tax Differentiation, Search Unemployment, and Home Production (October 2005). Oxford Economic Papers, Vol. 57, Issue 4, pp. 610-633, 2005. Available at SSRN: https://ssrn.com/abstract=916836

Per Engström (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 - 18 - 471 15 65 (Phone)
+46 - 18 - 471 14 78 (Fax)

HOME PAGE: http://www.nek.uu.se/cgi/staffpage.pl?PId=13,lang=eng

Bertil Holmlund

Uppsala University - Department of Economics ( email )

SE-75120 Uppsala
Sweden
+46 18 471 1122 (Phone)
+46 18 471 1478 (Fax)

HOME PAGE: http://www.nek.uu.se/faculty/holmlund/index.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

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

Ann-Sofie Kolm

Uppsala University ( email )

Department of Economics P.O. Box 513
SE-751 20 Uppsala
Sweden
+46 18 4711131 (Phone)
+46 18 4711478 (Fax)

Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden
+46 18 471 7081 (Phone)
+46 18 471 7071 (Fax)

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