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| Author: | Petrucci, A. Phelps, E.S. |
| Title: | Two-sector perspectives on the effects of payroll tax cuts and their financing |
| Journal: | Journal of Public Economics
2009 : FEB, VOL. 93:1-2, p. 176-190 |
| Index terms: | labour supply taxation |
| Language: | eng |
| Abstract: | This article examines the consequences of lifting from labor some of the burden of taxation in a life-cycle two-sector setup where a consumption good is produced alongside a capital good. This study analyzes the implications of alternative ways of financing payroll tax cuts in closed and small-open neoclassical economies. Tax cuts do not necessarily stimulate hours worked in the stationary state. It is shown that in the closed economy long-run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation. Manhours are left unchanged in the long-run, while capital information is spurred if government purchases of the capital good are decreased. In the small-open economy it is only if the offsets are a fall in entitlement spending or a rise in the wealth tax that aggregate manhours are increased. |
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