Striking a balance: Optimal tax policy with labor market duality |
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| Institution: | 1. Faculty of Economic Sciences, University of Warsaw, Poland;2. Group for Research in Applied Economics (GRAPE), Faculty of Management, University of Warsaw IZA, Poland;3. National Bank of Poland, Poland;1. Lehigh University and DePauw University, 621 Taylor Street, Bethlehem, PA United States;2. Lehigh University, 621 Taylor Street, Bethlehem, PA United States;3. Department of Economics, The University of Texas at Dallas, 800 W. Campbell Rd GR 31, Richardson, TX 75080, United States |
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| Abstract: | We develop a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers “secondary contracts.” When calibrated using aggregate tax revenue data, the model delivers estimates of secondary “off the books” employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix. |
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