-------- forwarded message ---------------------- Date: Thu, 28 May 1998 12:21:54 +0100 (BST) From: Gavin Cameron <[EMAIL PROTECTED]> Subject: uk-policy work-spreading tax Reply-To: [EMAIL PROTECTED] Following on from my previous posting, perhaps I should clarify why the Work-Spreading Tax would have little or no effect on unemployment. Firstly, my understanding of the WST is that it shifts the 'nominal incidence' of employees national insurance onto the employer. It should be clear that the nominal incidence of a tax is not the same as its 'economic incidence'. If capital is internationally mobile and labour is not, labour bears all the tax burden regardless of who notionally pays the tax. Secondly, the following quote from David Chapman's posting supports my argument that the WSJ is an example of the 'lump of labour fallacy': >Employers will thus have an incentive to spread the available work, so as >to receive more of these subsidies, employing more workers each working >fewer hours, to do a given amount of work. Of course, I may have misunderstood the WST scheme. It may have been making the slightly more sophisticated point that you could reduce payroll taxes and shift the burden onto consumption taxes (eg VAT) and so keep the overall tax burden constant (this is the point Geoff Beacon is making I think) . However, the key to understanding the impact of tax changes on employment is to recognize that it is the overall tax burden on labour (that is, payroll taxes plus personal income taxes plus consumption taxes) that is important, rather than just the payroll tax rate. Therefore, when I said that 'high overall labour taxes' could raise unemployment, I was not referring to payroll taxes in particular but to the total tax burden. A cut in payroll tax that is offset by a rise in VAT will have no effect on post tax real wages and so cannot raise labour supply. Therefore it will not reduce unemployment. There is a good discussion of this issue in a paper by Steve Nickell in the Journal of Economic Perspectives, Summer 1997 (see pages 68-81 especially). In short, there is no evidence that lowering payroll taxes and raising consumption taxes will raise employment. This explains why Denmark, which has no payroll taxes, has unemployment of about the European average. It may be however, that reducing the overall tax burden (the sum of payroll, income and consumption taxes) may reduce unemployment. Nickell suggests that a 10 percentage point fall in the total tax burden might reduce unemployment by around 25 percent. Of course, a 10 percentage point fall in the tax burden is an enormous change. Sadly, there are very few free lunches in economic policy. Gavin Cameron ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Dr Gavin Cameron Research Fellow Nuffield College, Oxford, OX1 1NF tel: +44 1865 278653 fax: +44 1865 278621 mobile: 0802 441340 http://www.nuff.ox.ac.uk/Users/Cameron/research.html ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ------------------------------------------------------------- Posted to uk-policy, a service of Nexus. http://www.netnexus.org/ Hosting and email provided by new media consultants On-Line Publishing Regards, Tom Walker ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ #408 1035 Pacific St. Vancouver, B.C. V6E 4G7 [EMAIL PROTECTED] (604) 669-3286 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The TimeWork Web: http://www.vcn.bc.ca/timework/
