Reinventing the Dutch tax-benefit system; exploring the frontier of the equity-efficiency trade-off

Ruud de Mooij

No 88, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Yet, economists have stressed the trade-off between these objectives. This paper reviews the key policy insights from optimal tax theory to identify options for reform in the tax-benefit system that can potentially improve the equity-efficiency trade-off. Using a comprehensive applied general equilibrium model, we then explore whether reforms along these lines in the actual Dutch tax-benefit system will raise employment without sacrificing equality. The analysis reveals that selective tax relief for elastic secondary earners and low-skilled workers have this potential. A flat income tax structure possibly combined with a negative income tax worsens the equity-efficiency trade-off.

JEL-codes: D31 D58 H24 J22 J68 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:cpb:discus:88

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