Macroeconomics effects of progressive taxation in a unionized economy

One of the main arguments against a public finance solution to unemployment is that, at least in the long run, the tax burden is passed onto labor. This paper assesses the robustness of existing propositions on the relation between tax progressivity and the labor market in an OLG general equilibrium framework that has not been previously used to address the tax progressivity issue. The ambiguity of our qualitative results clearly indicates that the determination of the macroeconomics effects of tax progressivity is an empirical question. On the basis of a calibration exercise for Italy and the US, the macroeconomics effects are determined and quantified. In particular, by looking at the labor market, larger employment effects are triggered by a reduction in both the average (personal income/payroll) tax rates. (c) 2005 Elsevier B.V. All rights reserved.