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TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU

TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU. Aino Salomäki DG ECFIN European Commission. TAXBEN PROJECT CEPS 27 November 2006. Statistical analysis of LM institutions (PRAXIS). The role of tax and benefit systems What theory predicts seems to hold better in NMS-8 than EU-15

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TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU

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  1. TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU Aino Salomäki DG ECFIN European Commission TAXBEN PROJECT CEPS 27 November 2006

  2. Statistical analysis of LM institutions(PRAXIS) • The role of tax and benefit systems • What theory predicts seems to hold better in NMS-8 than EU-15 • Tax wedge has a negative impact on participation, employment, hours worked , part-time empl (NMS) • Negative correl. betw. high METRs and empl. rate • Explained by the bargaining system • NMS-8: market determined wages ( a more homogeneous group) • EU-15: bargained wages (to different degrees) • NMS: tax wedge > EU-15 average; low UI benefits

  3. Efficiency of policies reg. employment and growth I = inefficient, N = neutral, E = efficient

  4. Tracking Reforms:LABREF

  5. Tracking Reforms:LABREF

  6. Tax wedge on low-wage (Single - 67% of average wage ) (14 MSs>=40%)

  7. Unemployment trap(Single earner- 67% of average wage ) 12 MSs METR>=80%

  8. FR vs. UK: role of unemployment benefit schemes • UK: min wage + flat rate UB • FR: min. wage + earnings-related UB -> UK institutions superior; FR UR 15 -> 8% • Suggesting that minimum wages and ER UB not a good mix of LM institutions • Due to high inefficient unemployment (Uin) • Why the removal of minimum wages would not be efficient? (FR UR 15 -> 18%; Uin 7 -> 12%) • Suggesting thatmore job offers would be at min. wage • Why would the reservation wages guide more wage offers? • What would be the role of bargaining institutions?

  9. FR :Payroll tax subsidies • Found to be welfare enhancing • Are there restrictions under which this finding holds? • UB and wage bargaining systems taken for granted? • Given that: • Min wage > reservation wage; high UB • Subsidy for 1 – 1.33 x min wage • Workers covered in 1995: 38%, 1998: 45% • Compressed wage distribution at the lower end of the wage scale • Costly policy • Questions: • Would another policy be less costly and more effective? • What role for wage bargaining systems? • Long-term effects on wage distribution?

  10. WHAT TO LEARN? • Effect of tax-benefit reforms depends on bargaining institutions • General tax reductions not very effective • Better results could be obtained from benefit reforms • Tax reforms should be combined with benefit reforms • Actual reform efforts in contrast with the conclusions • What role for distributional concerns? • Don’t we understand the preconditions for reforming LM institutions? What works and what doesn’t? • Should recommendations be more specific reg. LM institutions? One-size-does-not-fit-all not enough? • How Member States can improve their policies?

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