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Regulation and taxation: A complementarity

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  • Schoefer, Benjamin

Abstract

I show how quantity regulation can lower elasticities and thereby increase optimal tax rates. Such regulation imposes regulatory incentives for particular choice quantities. Their strength varies between zero (laissez faire) and infinite (command economy). In the latter case, regulation effectively eliminates any intensive behavioral responses to taxes; a previously distortionary tax becomes a lump sum. For intermediate regulation (where some deviation is feasible), intensive behavioral responses are still weaker than under zero regulation, and so quantity regulation reduces elasticities, thereby facilitating subsequent taxation. I apply this mechanism to labor supply and present correlational evidence for this complementarity: hours worked in high-regulation countries are compressed, and these countries tax labor at higher rates.

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  • Schoefer, Benjamin, 2010. "Regulation and taxation: A complementarity," Journal of Comparative Economics, Elsevier, vol. 38(4), pages 381-394, December.
  • Handle: RePEc:eee:jcecon:v:38:y:2010:i:4:p:381-394
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    Cited by:

    1. Moutsopoulos, Michael & Pelagidis, Theodore, 2021. "Labor Taxation: Insights From The World Economic Forum Survey," MPRA Paper 110823, University Library of Munich, Germany.
    2. Michael MITSOPOULOS & Theodore PELAGIDIS, 2021. "Labor Taxation And Investment In Developed Countries. The Impact On Employment," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(2), pages 13-31, June.
    3. Benjamin Schoefer, 2018. "Marginal Jobs and Job Surplus: Evidence from Separations and Unemployment Insurance," 2018 Meeting Papers 1309, Society for Economic Dynamics.

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