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Payroll taxes and VAT in a labor-turnover model of the ‘natural rate’

✍ Scribed by Hoon, Hian Teck


Publisher
Springer
Year
1996
Tongue
English
Weight
657 KB
Volume
3
Category
Article
ISSN
0927-5940

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✦ Synopsis


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.


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