Tax Differentiation, Search Unemployment, and Home Production
Posted: 29 Feb 2008
Date Written: October 2005
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: Suggested Citation