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International Tax and Public Finance

, Volume 21, Issue 2, pp 198–227 | Cite as

Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach

  • Brigitte van Baalen
  • Tobias MüllerEmail author
Article

Abstract

This paper analyzes the social welfare effects of tax-benefit reforms in a framework integrating endogenous labor supply and unemployment. We adopt an ordinal approach to social welfare comparisons by searching for “socially desirable” reforms that would improve social welfare for an entire class of social welfare functions. In the model, there is a discrete distribution of individuals’ productivities and individuals are heterogeneous with respect to leisure preferences (or disability of work). Labor supply decisions are limited to the participation decision. Unemployment is modeled in a search and matching framework with individual wage bargaining. For the social welfare analysis, the model is calibrated for Switzerland. Starting from a situation with an unemployment benefit scheme, the introduction of in-work benefits is shown to be a “socially desirable” reform: it would be unanimously preferred to the current situation according to all social welfare functions based on the criteria of Pareto, anonymity, and the principle of transfers. This result holds for two different types of preference heterogeneity (leisure preferences or disability of work) and also for the case where job search effort cannot be monitored.

Keywords

Tax-benefit reform Unemployment Search-matching models Social welfare Preference heterogeneity 

JEL Classification

D63 H21 J64 

Notes

Acknowledgements

We thank Bruno van der Linden, Jaime de Melo, and two anonymous referees for very helpful comments on earlier versions.

Supplementary material

10797_2012_9263_MOESM1_ESM.pdf (137 kb)
(PDF 137 kB)

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Swiss Federal Tax AdministrationBerneSwitzerland
  2. 2.Department of EconomicsUniversity of GenevaGeneva 4Switzerland

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