The Consequences of Tax Reforms

In this paper, I examine the effects of tax reforms for an economy in a welfare state. I do this by a macroeconomic model, which includes not only households, firms and a government but also a monopoly labour union. The households are of two types, workers and entrepreneurs. The workers are employed by the firms, which are owned by the entrepreneurs. This paper shows that decreasing labour taxation and increasing consumption taxation would have a number of positive effects. These include increased aggregate utility as well as increased consumption of the workers combined with increased profits of the entrepreneurs. Also the employment rate would improve. Decreasing profit taxation and increasing consumption taxation would also have positive effects, but only for the entrepreneurs. JEL Classification: H20, H24, H25, H31, H32 Keywords: taxation, tax reform, utilit