Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2001:19: Optimal Taxation in Search Equilibrium with Home Production

Per Engström (), Bertil Holmlund () and Ann-Sofie Kolm ()
Additional contact information
Per Engström: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Bertil Holmlund: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Ann-Sofie Kolm: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: The paper develops a two-sector general equilibrium search model where "goods" are produced exclusively in the market and "services" are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving. Numerical calibrations of the model suggest that the welfare gains from tax differentiation are large if the government absorbs a substantial fraction of GDP.

Keywords: Taxation; Home production; Search; Unemployment

JEL-codes: H21; J22; J41; J64

39 pages, October 22, 2001

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