published in: European Economic Review, 2012, 56 (2), 216-232
This paper is concerned with a policy oriented macroeconomic experiment involving an
'international' economy with a relatively small 'home' country and a large 'foreign' country. It
compares the economic performance of two alternative tax systems as a means to finance
unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system.
The two systems are applied to the home country, while the wage tax system always obtains
in the foreign country. In stark contrast with expectations of experts the sales tax system
clearly outperforms the wage tax system, using standard economic indicators. It is argued
that producers' reluctance to incur costs up-front while being uncertain about product prices
can explain this outcome. Several pieces of evidence are provided to support this claim. The
results strongly suggest that behavioral aspects have to be taken into account also in applied
macroeconomic models.
We use Google Analytics in compliance with German Data Protection Law. The site gathers data for the sole purpose of improving its services. You're able to decline now or later. By using our services, you agree to our use of cookies. You'll find more information here.