On Substituting Consumption Taxes for Unemployment Insurance Contributions to Reduce Unemployment

Tomas Kögel

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: The German conservative party (consisting of two sister parties) planned in case of victory in the national election on 18 September 2005 to reduce the unemployment insurance contributions by 2 percent and to finance this with an increase in the consumption tax by 2 percent. The present paper shows in a Layard-Nickell-Jackman type wage bargaining model that this tax reform does not reduce unemployment; neither in the short to medium run, nor in the long run. When there is short-to-medium-run real wage resistance, then in the short to medium run unemployment depends on the overall tax burden, but not on the composition of the tax burden. In the long run the wage setting curve is vertical and hence in the long run unemployment is even invariant of the overall tax burden.

Keywords: Consumption taxes; unemployment insurance contributions; payroll taxes. wage bargaining; unemployment. (search for similar items in EconPapers)
JEL-codes: H20 J51 (search for similar items in EconPapers)
Date: 2005-09, Revised 2005-09
New Economics Papers: this item is included in nep-ias, nep-lab and nep-pbe
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