Resource title

Tax progression under collective wage bargaining and individual effort determination

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Resource description

We study the impact of tax policy on wage negotiations, workers effort, employment, output and welfare when workers effort is only imperfectly observable. We show that the different wage-setting motives rent sharing and effort incentives reinforce the effects of partial tax policy measures but not necessarily those of more fundamental tax reforms. Although a higher degree of tax progression always leads to wage moderation, the well-established result from the wage bargaining literature that a revenue-neutral increase in the degree of tax progression is good for employment does not carry over to the case with wage negotiations and imperfectly observable effort. While it remains true that introducing tax progression increases employment and output, we cannot rule out negative effects from an increase in tax progression when tax progression is already very high. Welfare effects are ambiguous a priori but we derive sufficient conditions for welfare improving revenue-neutral increases in tax progression.

Resource author

Erkki Koskela, Ronnie Schöb

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26069

Resource license

Adapt according to the presented license agreement and reference the original author.