Tax reforms under market distortions in product and labour markets |
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| Affiliation: | 1. Unit of Translational Medicine, Department of Immunology and Rheumatology, Nagasaki University Graduate School of Biomedical Sciences, Sakamoto 1-7-1, Nagasaki 852-8102, Japan;2. Department of Rheumatology, Japan Community Health care Organization, Isahaya General Hospital, Isahaya 854-8501, Japan;3. Department of Tumor and Diagnostic Pathology, Atomic Bomb Disease Institute, Nagasaki University, Nagasaki 852-8523, Japan;4. Department of Hematology, Nagasaki University Hospital, Sakamoto 1-7-1, Nagasaki 852-8102, Japan;5. Department of Pathology, Nagasaki University, Sakamoto 1-7-1, Nagasaki 852-8102, Japan |
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| Abstract: | Using a two-agent model comprised of capitalists and workers, this paper examines the importance of imperfect competition in product and labour markets in determining the welfare effects of tax reform. The reform considered consists of eliminating the capital tax alongside a concurrent rise in the labour tax. In contrast to the perfectly competitive model, models with product or labour market failures each result in welfare losses for the workers in the long-run. In a realistic calibration to the UK economy, combining these imperfections implies that this tax reform will be Pareto improving in the long-run. However, these welfare gains over longer time horizons come at the cost of short-run losses, which, consistent with previous research, result in welfare losses for workers post-reform. |
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| Keywords: | Market imperfections Heterogeneous agents Unemployment Tax reform |
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