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Oxford Economic Papers Advance Access originally published online on February 28, 2005
Oxford Economic Papers 2005 57(4):610-633; doi:10.1093/oep/gpi023
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Right arrow D13 - Household Production and Intrahousehold Allocation
Right arrow E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution
Right arrow H20 - General
Right arrow H21 - Efficiency; Optimal Taxation
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© Oxford University Press 2005; All rights reserved

Tax differentiation, search unemployment, and home production

Per Engström*, Bertil Holmlund{dagger}, and Ann-Sofie Kolm{ddagger}

*Department of Economics, Uppsala University; e-mail: per.engstrom{at}nek.uu.se {dagger}Department of Economics, Uppsala University, Box 513, SE-751 20 Uppsala, Sweden; e-mail: bertil.holmlund{at}nek.uu.se {ddagger}Department of Economics, Stockholm University; e-mail: ann-sofie.kolm{at}ne.su.se

The paper develops a two-sector general equilibrium search model where ‘goods’ are produced exclusively in the market and ‘services’ are produced both in the market and within the households. We use the model to examine how unemployment and welfare are affected by labor taxes in general and sectoral tax differentiation in particular. We find that a tax cut on services reduces unemployment whereas a tax cut on goods has no effect. A reform involving tax differentiation, with lower taxes on services, is welfare improving under certain conditions. Numerical calibrations of the model suggest that the welfare gains from tax differentiation may be large.

Key Words: JEL classification: H21 • J22 • J41 • J64


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