Does the Wage Tax System Cause Budget Deficits? A Macro-economic Experiment

Arno Riedl and Frans van Winden ()

Public Choice, 2001, vol. 109, issue 3-4, 94 pages

Abstract: In this paper we investigate experimentally the economic functioning of a wage tax system for financing unemployment benefits in an international economy, in particular in reaction to budget deficits and tax adjustment. Our results support the hypothesis that due to out-of-equilibrium price uncertainty producers are reluctant to employ inputs. We also observe a downward pressure on wages exacerbated by an over-supply of labor by consumers. These observations can explain the budget deficits found. Furthermore, we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real GDP. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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