Tax Reforms, Collective Bargaining and Imperfect Capital Markets

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Title: Tax Reforms, Collective Bargaining and Imperfect Capital Markets
Author: Hohenthal, Michael
Contributor: University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies
Date: 2018-12
Thesis level: Licentiate thesis
Abstract: This paper discusses possible consequences of tax reforms. The tax system consists of labor income, capital income and consumption taxes. I consider the effects on Gross Domestic Product, capital stock, the employment rate, the wage rate, the representative worker's wealth, private consumption and the welfare of the households. I assume that the government's budget is balanced. I establish a macroeconomic model that consists of heterogeneous households, firms, labor market organizations and the government. There are two types of households – workers and firm owners. In the model, the firm owners and the firms are merged into one agent, entrepreneurs. The labor market organizations – the labor union representing the workers and the employers' federation representing the entrepreneurs – bargain over the wages and the level of employment. Hence, the labor market is neither perfect nor based on a monopoly labor union. I consider imperfect capital markets, where borrowing is subject to a risk premium, and an open economy with the possibility to import or export capital. I show that decreasing the taxes on labor income, capital income and consumption separately, combined with decreased government expenditures, has mostly positive effects on the Gross Domestic Product, the capital stock, the employment, the consumption of workers and entrepreneurs as well as the utility of the entrepreneurs. However, the reforms’ effects on the workers' wealth are contradictory. The same concerns the workers’ utility. A combined decrease of the taxes on labor income, capital income and consumption with a decrease of government expenditures generally impacts the economy positively. The exception is a decreased gross wage, which is, however, compensated by the lower labor income tax. The contribution of this paper is that I examine taxation in an open economy with imperfect labor and capital markets. I show that a decreased tax burden with decreased government expenditures has a number of positive macroeconomic effects. Thus, the reforms examined in this paper indicate what kinds of policy action could be of benefit to the economy.
Discipline: Taloustiede

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