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Striking a balance: optimal tax policy with labor market duality

Gilbert Mbara, Ryszard Kokoszczyński and Joanna Tyrowicz ()
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Gilbert Mbara: Group for Research in Applied Economics (GRAPE)

No 16, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers "secondary contracts". When calibrated, the model yields estimates of secondary labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.

Keywords: Laffer curve; tax evasion; labor market duality (search for similar items in EconPapers)
JEL-codes: H2 H26 H3 E13 E26 J81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eec, nep-iue, nep-mac and nep-pbe
Date: 2017
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