Tax differentiation, search unemployment, and home production

Per Engström, Bertil Holmlund () and Ann-Sofie Kolm

Oxford Economic Papers, 2005, vol. 57, issue 4, 610-633

Abstract: The paper develops a two-sector general equilibrium search model where 'goods' are produced exclusively in the market and 'services' are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving under certain conditions. Numerical calibrations of the model suggest that the welfare gains from tax differentiation may be large. Copyright 2005, Oxford University Press.

Date: 2005
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