Does a shift in the tax burden create employment?

Abstract

According to Dalton's Law it does not matter which side of the market is taxed. This holds for a model of the labour market as well. Nevertheless, it is often maintained that shifting the wedge from employers to employees has favourable effects on employment. That is, a shift from employers' to employees' taxes decreases wages and hence unemployment. This apparent paradox is discussed by analysing the impact of taxes in a wage bargaining model - it is shown that Dalton's Law does not necessarily hold in those models. The findings are illustrated by empirical results concerning tax shifting by employers and employees for the Netherlands. It is found that no employers' taxes are shifted backwards, whereas about 44% of employees' taxes are shifted forwards. These values imply a positive effect on employment of a reduction of the wedge in favour of employers.