Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off
European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Yet, economists have stressed the trade-off between these objectives. This paper reviews the key policy insights from optimal tax theory to identify options for reform in the tax-benefit system that can potentially improve the equity-efficiency trade-off. Using a comprehensive applied general equilibrium model, we then explore whether reforms along these lines in the Dutch tax-benefit system raise employment without sacrificing equality. The analysis reveals that selective tax relief for elastic secondary earners and low-skilled workers have this potential. A flat income tax structure, possibly combined with a negative income tax, worsens the equity-efficiency trade-off.
- D31 : Personal Income, Wealth, and Their Distributions
- H24 : Personal Income and Other Nonbusiness Taxes and Subsidies
- D58 : Computable and Other Applied General Equilibrium Models