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Tax structure, inflation and unemployment

 
Paper:ewp-mac/9508002
From: Thomas Cool <   > 
Date: Mon, 14 Aug 1995 14:06:10 +0200

Abstract:
Last decades show internationally a worsening 'trade-off' between inflation and unemployment, which phenomenon is called stagflation. A possible cause is the structure of taxes and premiums that OECD nations have in common. This common structure has a dynamic component: a tendency of reduction of both exemption and statutory marginal rates. The economic theory behind this policy and structure uses comparative statics and partial derivatives. The alternative dynamic analysis uses total derivatives, and thus takes account of tax parameter changes. In dynamics, the marginal rate relevant for incentives is close to the average tax rate. What is wrong about current policies, is that exemption is indexed on inflation while subsistence rises with inflation and real income. This causes either poverty or rising minimum wages, thus benefits, taxes, and lower incentives. If exemption was put at subsistence, then jobs could be created at the low end of the labour market, which saves benefits and reduces average taxes, which increases incentives. If low productivity labour has a stronger position in the labour market, then the risk of unemployment is spread more evenly, and trend-setting high productivity labour will be cautious about wage claims. Since the present situation is inefficient, an improvement is possible from which everybody can benefit (Pareto improving).

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A Chinese curse states May you live in intersting times. I have. Bob Parks - Jan 2006