Income taxation, employment and welfare

This article discusses whether employment and welfare can be raised by shifting the tax burden away from low-skilled labour: Traditional neoclassical theory predicts that such a tax reform will reduce employment by increasing the progressivity of the labour income tax. In contrast more realistic theories allowing for labour market imperfections suggest that progressive labour income taxation can be defended on pure efficiency grounds. On this basis there seems to be a good case for improving tax incentives for employment at the low end of the pay scale.