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HOW FISCAL POLICIES REDUCE LABOR FORCE PARTICIPATION IN OPEN ECONOMIES: EVIDENCE ON TAX COMPETITION AND COMPENSATION HYPOTHESES

Stacie Beck () and Soodong Park
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Stacie Beck: Department of Economics, University of Delaware

No 14-16, Working Papers from University of Delaware, Department of Economics

Abstract: The tax competition hypothesis is that market integration places downward pressure on capital taxes and social expenditures. The compensation hypothesis asserts that market integration results in increased social expenditures and higher tax burdens. Using panel data over 1980-2012 from 26 OECD countries, we found evidence of their coexistence and interaction. We find that the negative effects of social spending and tax policy on labor force participation are heightened in open economies, with a stronger impact from compensative social expenditures. Increased social expenditures reduce labor force participation directly and also indirectly through a higher labor tax burden.

Keywords: fiscal policy; open economy; labor force participation; tax competition; compensation hypothesis; panel VAR (search for similar items in EconPapers)
JEL-codes: F68 H20 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014
New Economics Papers: this item is included in nep-fdg and nep-lab
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