The Employment Effects of Different Regimes of Welfare State Taxation: An empirical Analysis of Core OECD-Countries”, Max-Planck-Institut für Gesellschaftsforschung, Discussion Paper 02/8

Among policy-makers and academics there is a controversial discussion whether the tax mix in-fluences labor market performance in advanced industrialized countries. Many economists argue that the total tax burden rather than the tax-mix matters for aggregate employment, whereas nei-ther the burden nor the mix play major roles in determining unemployment in the long run. This paper aims at combining this literature with an analysis informed by comparative welfare state analysis. It starts with a discussion of standard economic accounts – the “incentives literature ” – and looks for cases where tax-mixes affect labor markets. Then the analysis shifts to a comparative point of view. Contemporaneous welfare states not only differ in terms of social expenditures, but also in the ways they fund these expenditures by various forms of taxation. The paper shows some of the linkages between the “tax regime ” on the one hand, and the regime for social expen-ditures, and namely social transfers, on the other hand. The tax regime is, however, an imperfect “mirror image ” of social expenditures and has the capacity to shape labor market outcomes. In particular, countries with high payroll and indirect taxation pose more problems for (low-wage) private sector employment than countries relying predominantly on income taxation. Moreover