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Income and substitution effects of fiscal policy on work effort

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  • Basil Dalamagas

Abstract

The focus of this paper is twofold. First, it examines the impact on work effort of changes in government purchases financed with lump-sum taxes, in a neoclassical framework, with respect to four industrialised countries. Second, it reconsiders the expenditure-work effort relationship in a broader conceptual context that allows for distortionary taxation and a disaggregation of the income and substitution effects. Our findings are shown to cast doubt on the empirical plausibility of the prevailing (neoclassical and New Keynesian) models which seem to rely heavily on the lump-sum tax notion, thus ignoring the substitution effects of distortionary taxation.

Suggested Citation

  • Basil Dalamagas, 2005. "Income and substitution effects of fiscal policy on work effort," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(2), pages 219-242.
  • Handle: RePEc:taf:irapec:v:19:y:2005:i:2:p:219-242
    DOI: 10.1080/02692170500031760
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    References listed on IDEAS

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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. Ranjini L. Thaver, 2013. "Integrating The Output And Substitution Effects Of Production Into The Intermediate Microeconomics Textbook," Business Education and Accreditation, The Institute for Business and Finance Research, vol. 5(1), pages 81-90.

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    More about this item

    Keywords

    Taxation; government spending; work effort; fiscal ignorance; income effect; substitution effect; country-specific determinants of employment; lump-sum vis-a-vis distortionary taxes; JEL Classification: E1; E6;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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