Striking a Balance: Optimal Tax Policy with Labor Market Duality

Gilbert Mbara, Joanna Tyrowicz and Ryszard Kokoszczyński

No 13631, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper develops a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers "secondary contracts". When calibrated using aggregate tax revenue data, the model delivers estimates of secondary "off the books" employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.

Keywords: tax evasion; labor market duality; Laffer Curve (search for similar items in EconPapers)
JEL-codes: E13 E26 H2 H26 H3 J81 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2020-08
New Economics Papers: this item is included in nep-dge, nep-iue, nep-lab, nep-mac and nep-pbe
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Published - published in: Journal of Macroeconomics, 2020, 66, 103245

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https://docs.iza.org/dp13631.pdf (application/pdf)

Related works:
Journal Article: Striking a balance: Optimal tax policy with labor market duality (2020)
Working Paper: Striking a balance: optimal tax policy with labor market duality (2017)
Working Paper: Striking a balance: optimal tax policy with labor market duality (2017)
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