Income Tax Effect on Economic Performance in Terms of Endogenous Choice between Labor and Enterprise Market

Yury Achkasov and Nikolay Pilnik

Journal of the New Economic Association, 2017, vol. 33, issue 1, 12-27

Abstract: The paper presents the general equilibrium model describing the interaction between heterogeneous agents, chosing between the labor market and business, and the government, which is responsible for collecting the tax on profits of private entrepreneurs and the redistribution of funds received. Each agent has one unit of labor, and he is a neutral to the risk and indifferent to the individual leisure. An agent have two variants of behavior: he can become wage-worker in a perfectly competitive labor market and receive at the same time the equilibrium wage. Another option - he can open his own company (which he devoted all his time), and hire workers in the labor market. Every entrepreneur has a production function depending on his managerial ability. Businessman chooses the optimal amount of hired labor that maximizes his profit. It is shown that the introduction of an extremely small tax does not affect the aggregate output in the economy, and increases the supply of labor and reduces wages. A further increase in the tax rate leads to a growing negative impact on the total supply of the product. It is shown that these conclusions are correct in the case where the tax base is an accounting rather than economic profit. The introduction of the tax on economic profit in fact coincide with the simultaneous introduction of tax on accounting profit and wages, with the result that the parameters do not change the balance in the economy. Consequences of imposition of a income tax on the basic parameters of equilibrium are estimated.

Keywords: general equilibrium; self-employment; income tax; labor supply (search for similar items in EconPapers)
JEL-codes: D50 E24 H20 J24 L11 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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