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Tax differentiation, search unemployment, and home production

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  • Per Engström
  • Bertil Holmlund
  • Ann-Sofie Kolm

Abstract

The paper develops a two-sector general equilibrium search model where 'goods' are produced exclusively in the market and 'services' are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving under certain conditions. Numerical calibrations of the model suggest that the welfare gains from tax differentiation may be large. Copyright 2005, Oxford University Press.

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  • Per Engström & Bertil Holmlund & Ann-Sofie Kolm, 2005. "Tax differentiation, search unemployment, and home production," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 610-633, October.
    • Handle: RePEc:oup:oxecpp:v:57:y:2005:i:4:p:610-633
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    File URL: http://hdl.handle.net/10.1093/oep/gpi023
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    Cited by:

    1. Ryuhei Okumura & Dapeng Cai, 2009. "Heterogeneous Individuals and the Optimal Level of Higher Education," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(1), pages 37-50, March.

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