Abstract
European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Yet, economists have stressed the trade-off between these objectives. This paper reviews the key policy insights from optimal tax theory to identify options for reform in the tax-benefit system that can potentially improve the equity-efficiency trade-off. Using a comprehensive applied general equilibrium model, we then explore whether reforms along these lines in the Dutch tax-benefit system raise employment without sacrificing equality. The analysis reveals that selective tax relief for elastic secondary earners and low-skilled workers have this potential. A flat income tax structure, possibly combined with a negative income tax, worsens the equity-efficiency trade-off.
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de Mooij, R.A. Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off. Int Tax Public Finance 15, 87–103 (2008). https://doi.org/10.1007/s10797-007-9048-6
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DOI: https://doi.org/10.1007/s10797-007-9048-6