Sonedda, Daniela; (2003) Tax Progressivity, Labour Markets and Growth. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

Public finance solutions to high unemployment in Europe have often been advocated during the past years. When unemployment benefits are not taxed, for instance, lower average labor taxes reduce the replacement ratio, and unions are willing to accept lower pre-tax wages because the net income loss from employment increases (see Pissarides [1998], Lockwood and Manning [1993]). However, as many argue (see for example Sorensen [1997]), several potential distortions such as human capital formation and disincentives to work effort are related to a strongly progressive taxation system. Indeed, with the so called "skilled-biased technological change" and the consequent increase in wage (income) inequality, governments in charge pay more attention to the growth effect of redistributive policy. The first two chapters of this thesis focus on the relationship between labour tax progressivity and the labour market. The third chapter analyses the growth's effects of a progressive labour taxation system. In the first chapter we present a general equilibrium, overlapping generations (OLG) model in which labour supply is endogenous and the labour market is fully unionised. The theoretical model and a calibration exercise for Italy and the US, cast some doubt on the view that powerful unions are able to shift the tax burden onto firms. However, our policy experiments find also some evidence in favour of the Daveri and Tabellini's [2000] hypothesis according to which an economy's poor employment performance can be related to labour taxation. The second chapter presents a theoretical model and an empirical investigation over Italy on the relation between progressive labour taxation and wage determination. We add to the current literature another economic mechanism which builds on the strategic interactions among unions and which helps generating a positive relationship between wage determination and changes in the marginal tax rates. The empirical evidence indeed shows that higher tax progressivity increases pre-tax wages in Italy. Finally, the third chapter of this thesis models the individuals' investment in physical capital and education decisions in presence of borrowing constraints and a progressive taxation system. The empirical evidence for 15 OECD countries suggests that higher redistribution affects growth conditioning on the degree of tax progressivity and the taxation level.

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