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The Impact of Taxes on Employment and Economic Growth in Industrialized Countries

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  • Seward, Thomas

Abstract

Looking at economic trends in industrialized countries during the time frame 1965 to 1995, there has been an upward trend in unemployment, which appears to be related to the slowdown of economic growth. However, the relation between unemployment and a slowing growth pattern stems from an external variable: a rapid increase in the cost of labor. There are many factors behind the rise of labor costs, but the most significant reason is from higher taxes being placed on labor. Increasing labor taxes have two primary effects on employment and growth. First, the demand for labor is decreased as the cost rises, therefore creating unemployment. Second, because the cost of labor rises, firms will begin replacing labor with capital until the marginal product of capital falls, diminishing the incentive for investment and growth. The empirical evidence found in this paper proves this theory is accurate as a 10 percentage point increase in the tax rate on labor increase the unemployment rate by 5.3 percentage points and decreases growth by 2.1 percentage points.

Suggested Citation

  • Seward, Thomas, 2008. "The Impact of Taxes on Employment and Economic Growth in Industrialized Countries," MPRA Paper 16574, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16574
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    References listed on IDEAS

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    1. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 48-104.
    2. Mofidi, Alaeddin & Stone, Joe A, 1990. "Do State and Local Taxes Affect Economic Growth?," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 686-691, November.
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    Cited by:

    1. Michael Mitsopoulos, 2017. "Overtaxation of Private Sector Salaried Employment as a Key Impediment to the Recovery of Greece," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Dimitrios D. Thomakos & Konstantinos I. Nikolopoulos (ed.), Taxation in Crisis, chapter 12, pages 289-336, Palgrave Macmillan.
    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. Dladla, Khumbuzile & Khobai, Hlalefang, 2018. "The impact of Taxation on Economic Growth in South Africa," MPRA Paper 86219, University Library of Munich, Germany.
    4. Maganya Mnaku Honest, 2020. "Tax revenue and economic growth in developing country: an autoregressive distribution lags approach," Central European Economic Journal, Sciendo, vol. 7(54), pages 205-217, January.

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    More about this item

    Keywords

    Taxes; Economic Growth; Employment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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