Laszlo Goerke - Böcker

Unemployment remains a major problem for economic policy at the beginning of the millennium. "Taxes and Unemployment" investigates how tax policy affects labour market outcomes in industrialized countries and to what extent it can be used to combat unemployment. In particular, the wage and employment consequences of tax rate variations, the impact of changes in tax progression and of comprehensive tax reforms are analyzed. It is shown that the employment effects of tax policy depend crucially on the institutional features of the labour market. These features are often country-specific and include the strength of collective bargaining institutions relative to other mechanisms of wage determination, the tax treatment of the jobless, the legal incidence of taxes and the exact specification of the tax system. Therefore, "Taxes and Unemployment" advocates an approach to reducing unemployment which is tailored to the specific characteristics of labour markets. Moreover, the analysis indicates that tax reforms need to be supported by other policy measures to regain full employment.

This chapter has set out in detail the models which are employed below in order to analyse the labour market effects of changes in tax rates and in alterations in the tax structure. The fundamental mechanisms underlying the different approaches have been pointed out. Moreover, vital assumptions have been emphasised. By delineating the models which are used for the subsequent analyses, implicitly statements have also been made about topics or aspects which this study does not cover. For example, all workers and firms are identical ex­ ante. However, ex-post differences are allowed for, inter alia, if unemploy­ ment occurs or if some firms have to close down. These restrictions indicate areas of future research insofar as that the findings for homogeneous workers or firms yield an unambiguous proposal for changes in tax rates or the tax structure in order to promote employment. This is because it would be desir­ able for tax policy to know whether the predicted effects also hold in a world with ex-ante heterogeneity. Furthermore, the product market has not played a role. Therefore, repercussions from labour markets outcomes on product demand - and vice versa - are absent. 55 Moreover, neither the process of capital accumulation, be it physical or human capital, nor substitution pos­ sibilities between labour and capital in the firms' production function are taken into account. Finally, international competition is not modelled.