Bo Sandemann Rasmussen

Efficiency Wages and the Long-Run Incidence of Progressive Taxation

Progressive income taxation has for some time been recognized to provide incentives for wage restraint in models with imperfectly competitive labour markets. Recent research has established that bargaining over individual working hours may reverse the wage restraining effect such that increased tax progression may reduce employment. In the present paper an alternative explanation for such adverse employment effects is suggested. Using an efficiency wage model it is shown that long run adjustment in the number of firms to changes in profits may imply that an increase in tax progression has adverse employment effects when all the budgetary effects of the tax reform are taken into account.

Effort, taxation and unemployment

The importance of the design of the income tax system for the incentive to supply effort is considered for both a situation where firms (efficiency wage model) or unions (monopoly union model) have the power to determine wages. A tax reform raising marginal taxes at all income levels and increasing (decreasing) average taxes at high (low) income levels may lead to higher wages, lower employment and higher unemployment under either wage determination regime.

Long run effects of employment and payroll taxes in an efficiency wage model

In equilibrium models of unemployment, e.g., efficiency wage models, the level of unemployment generally depends on the level of taxes on labor (see, e.g., Johnson and Layard (1986) and Pisauro (1991)). Considering labor taxes levied on firms, the tax authorities may choose between employment and payroll taxes where the former is a head tax on the number of employees while the latter is a tax on the cost of labor to firms. Pisauro (1991) has shown in a short-run efficiency wage model that the incidence of employment and payroll taxes generally differ and, in particular, that employment taxes lead to less wage restraint than payroll taxes. Extending his model to the long run by allowing for free entry and exit of firms, we go one step further and consider whether changes in the composition of labor taxes, balancing the government budget, affect equilibrium unemployment in the long run. Our results reveal, perhaps somewhat surprisingly given the result that payroll taxes lead to more wage restraint than employment taxes, that more extensive use of employment taxes instead of payroll taxes, balancing the government budget, increases the level of employment and decreases unemployment.

Optimal fiscal policy in open economies with labour market distortions

Abstract We set up a general equilibrium model with unemployment owing to distortions in the labour market. It is shown that a public expansion, financed by a distortionary income tax, may give rise to a decrease in unemployment. Even if public goods are pure waste, such an expansion may give rise to an increase in welfare if it is associated with a decrease in unemployment. Since part of the gain from a fiscal expansion is achieved at the expense of welfare in other countries, non-cooperative policies tend to be too expansionary.

Union Cooperation and Nontraded Goods in General Equilibrium

A general equilibrium model of a small open economy with traded and nontraded goods and sector-specific trade unions is set up. Wage formation is either noncooperative or cooperative. Egalitarian union wage policy is shown to be the equilibrium under cooperation. Important asymmetries are encountered and an alternative model of cooperative behavior called bargaining cooperation is proposed. Bargaining cooperation is shown to have qualitatively different implications than simple cooperation. The welfare and employment effects of bargaining cooperation compared to simple cooperation are ambiguous. Copyright 1992 by The editors of the Scandinavian Journal of Economics.

Exchange rate policy, union wage index and credibility

Abstract Optimal exchange rate regimes for small open economies with economy-wide wage setting and privately optimal wage indexation schemes are analysed. A fully discretionary exchange rate regime (a managed float) offers flexibility while a credible fixed exchange rate regime offers price stability. Due to the time-inconsistency problem optimal wage indexation under a managed float may imply complete indexation of wages to prices. A managed float is shown to be unambiguously superior to a binding fixed exchange rate regime if wage setters value price stability as high as the policy-maker does.

Non-Equivalence of Employment and Payroll Taxes in Imperfectly Competitive Labor Markets.

Equilibrium allocations in competitive labor market models are independent of whether labor taxes on firms are levied as employment taxes or payroll taxes, for given tax revenue. Turning to non-competitive labor market models, like wage bargaining of efficiency wage models, the two taxes cease to be equivalent in the sense that balanced-budget substitutions of one tax for the other affect equilibrium allocations. However, while more extensive use of payroll taxes always increases equilibrium employment in the wage bargaining model, it may lead to a lower level of equilibrium employment in the efficiency wage model.

On the Possibility and Desirability of Taxing E-Commerce

Over the past decade the taxation of e-commerce has been widely discussed among politicians, tax law experts and economists. To put some perspective on this issue it is analyzed to what extent e-commerce can actually be taxed and the severity of the ensuing tax revenue losses following from future growth of e-commerce is discussed. Since the US and the EU cases differ substantially they are considered separately. Subsequently various arguments supporting the view that e-commerce should receive preferential tax treatment are considered. Although no firm recommendations can be provided some interesting topics for future research are suggested.

Preferential Taxation of E-Commerce: Imperfectly Competitive Retail Market and Trade Costs

E-commerce in physical goods enhances the degree of product market competition but leads also to higher trading costs as goods bought through the internet are shipped individually. Do these features of e-commerce support a case for granting preferential tax treatment to online shopping? This is investigated using a model with a domestic monopolistic retailer and foreign competitive producers that can either deliver a physical good to the retailer (ordinary trade) or directly to domestic consumers (e-commerce). Although it is possible to construct cases of strictly positive welfare effects the general result is that granting tax preferences to e-commerce will have ambiguous welfare consequences.

On the Determinants of Optimal Border Taxes for a Small Open Economy

For a small open economy where the government is restricted to raise revenue using border taxes only, the optimal structure of border taxes is considered. As a matter of normalization exports and the supply to the market of the primary factor may be assumed to be untaxed, but that the household use of the primary factor and domestic consumption of the export good cannot be taxed is nevertheless a constraint; this insight provides the key to understanding what determines the optimal tariff structure. The optimal border tax structure is derived for both exogenous and endogenous labour supply, and the results are interpreted in the spirit of the Corlett-Hague results for the optimal tax structure in a closed economy and compared with results from CGE models.