The Dutch Tax-Benefit System and Life-Cycle Employment: Outcomes and Reform Options

ECO Working Paper No. (2008)25

25 Pages Posted: 3 Dec 2008

See all articles by Ekkehard Ernst

Ekkehard Ernst

International Labour Organization (ILO)

Timo Teuber

affiliation not provided to SSRN

Date Written: December 3, 2008

Abstract

An overlapping-generations model with search unemployment is calibrated for the Netherlands to assess the impact of tax-benefit reforms on labour supply. Several reforms are analysed, in particular the introduction of a flat tax and pension reforms. The model demonstrates the potential of these reforms to raise labour supply. In particular, pension reforms, such as lowering replacement rates for pensioners, help to boost participation rates of older workers. On the other hand, a flat tax would promote longer working hours across the board, thereby rising labour supply. However, the introduction of a flat tax is a costly measure and would increase the primary general government deficit by close to 2% of GDP. Simultaneous measures to lower the structural unemployment rate would not only help to avoid adverse effects of such a tax reform on the fiscal balance but would strengthen further the positive effects of a flat tax on working hours.

Keywords: Netherlands, overlapping-generations model, dynamic tax-benefit policies, equilibrium unemployment, labour market search frictions, pension reforms, tax reforms

JEL Classification: D91, E24, J64, J26

Suggested Citation

Ernst, Ekkehard and Teuber, Timo, The Dutch Tax-Benefit System and Life-Cycle Employment: Outcomes and Reform Options (December 3, 2008). ECO Working Paper No. (2008)25, Available at SSRN: https://ssrn.com/abstract=1310583 or http://dx.doi.org/10.2139/ssrn.1310583

Ekkehard Ernst (Contact Author)

International Labour Organization (ILO) ( email )

Route des Morillons 4
Geneva, 1211
Switzerland
+41 22 799 77 91 (Phone)

Timo Teuber

affiliation not provided to SSRN ( email )

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