Value-Added Tax Versus Social Security Contributions
22 Pages Posted: 18 Oct 1999
Date Written: August 1999
In order to alleviate unemployment it is often recommended to reduce social security contributions (SSC) and to compensate for the ensuing loss in revenues by a rise in the value-added tax (VAT). Assuming unemployment to be caused by efficiency wages, it is shown that a balanced-budget shift from a payroll tax to a VAT will increase employment if the rise in the VAT does not alter consumer prices. If the effects of a shift from SSC to the VAT on the worker's effort are neutralized, for example, by imposing a constant wedge, the employment impact will depend on the nature of the unemployment compensation system.
JEL Classification: H24, H25, J32, J41
Suggested Citation: Suggested Citation