Essays on Taxes and Wage Formation

Jukka Lassila

No 32 in ETLA A from The Research Institute of the Finnish Economy

Abstract: The essays in this collection approach taxation as a group of policy instruments, and study how their use is connected to and affected by wage formation in the economy. In the first essay taxation acts as an automatic stabiliser in the face of different shocks. The study combines two theoretical models from previous literature. It shows that earlier results, concerning both income tax indexation and the role of openness in deciding the optimal degree of wage indexation, do not hold under more general assumptions. In the second essay the aim of policy is to cure an acute inflation problem. The instrument is a conditional threat to increase taxes. The study develops a one-shot game describing the determination of the threat and the decisions of the unions. The article gives one possible rationalisation for the use and success of tax threat policies, and discusses reasons why this instrument is not used more often. In the third essay the aim of policies is to increase efficiency and welfare in the economy. Households and firms have fully adjusted their behaviour to the tax and transfer structure. Wages are set by majority-voting in a centralised monopoly union. The essay extends a well-known general equilibrium simulation model to include a trade union. Taxes and transfers are shown to affect the economy through dynamic channels and in a way depending significantly on wage formation.

Keywords: taxation; wage formation; trade unions (search for similar items in EconPapers)
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