Can Tax Cuts Increase Investment in a Unionised Economy?

John Creedy and Ian McDonald ()

Economic Analysis and Policy, 1993, vol. 23, issue 2, 123-137

Abstract: This paper derives conditions for tax cuts to stimulate output without crowding out investment. In the model the level of output is constrained by an aggregate supply constraint. This constraint is based on the real wage demands of an insider-dominated trade union seeking to maximize its objective function. It is found that, in the model, tax cuts have a powerful supply-side effect and, for reasonable values of the parameters, will not force a crowing out of investment. Of the tax cuts considered, raising the income tax threshold has a larger supply side effect than reducing the marginal tax rate.

Date: 1993
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