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.

Additional Metadata
Keywords Applied general equilibrium, J22, J68, Labour supply, Tax-benefit system, The Netherlands, Unemployment
JEL Personal Income, Wealth, and Their Distributions (jel D31), Computable and Other Applied General Equilibrium Models (jel D58), Personal Income and Other Nonbusiness Taxes and Subsidies (jel H24)
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Journal International Tax and Public Finance
de Mooij, R.A. (2008). Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off. International Tax and Public Finance, 15(1), 87–103. doi:10.1007/s10797-007-9048-6