Search

An article by Francesco Daveri and Guido Tabellini (2000) combines empirics and a general-equilibrium overlapping-generations model to recommend the reduction of labor taxation and pension expenditures. I demonstrate that, in the model, unemployment would be zero if unemployment benefits remained between zero and a certain value that is dependent on the level of wage taxation. My demonstration leads to two questions: (1) Why should the government introduce unemployment benefits in an economy that otherwise would always operate at full employment? (2) Why is the reader led to believe that the reduction of labor taxation and pension expenditure are the main economic policy indications that derive from the model? Since, in the Daveri and Tabellini model, unemployment benefits are a waste of resources, the reduction of unemployment benefits is the best way to reduce unemployment.

This paper analyzes the effects of symmetric and asymmetric taxation on performance-based versus fixed remuneration contracts. I integrate a proportional corporation tax and a proportional wage tax into a binary principal-agent model. The wage tax increases the remuneration costs and makes the agent's employment less attractive. Thus, the principal tends to demand lower rather than higher effort or does not offer a contract at all. In contrast to the wage tax, the corporate tax is irrelevant for the optimal remuneration contract. Under asymmetric corporate taxation, the principal tends to offer contracts less frequently. Fixed remuneration contracts are penalized more heavily by asymmetric taxation than performance-based remuneration contracts.

This paper analyzes the effects of symmetric and asymmetric taxation on performance-based versus fixed remuneration contracts. I integrate a proportional corporation tax and a proportional wage tax into a binary principal-agent model. The wage tax increases the remuneration costs and makes the agent's employment less attractive. Thus, the principal tends to demand lower rather than higher effort or does not offer a contract at all. In contrast to the wage tax, the corporate tax is irrelevant for the optimal remuneration contract. Under asymmetric corporate taxation, the principal tends to offer contracts less frequently. Fixed remuneration contracts are penalized more heavily by asymmetric taxation than performance-based remuneration contracts.

We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.This discussion paper resulted in a publication in the European Economic Review.(51(4) 871-900.)