Taxation, credit frictions and the cyclical behavior of the labor wedge

Abstract

Labor-income and consumption taxes are often referred to as the primary causes of the labor wedge and differences in hours worked across countries. While this can be potentially true in the long-run, its premise for explaining the cyclical behavior of the labor wedge is questionable. Using U.S. data over 1955-2019, this paper first studies whether taxation explains the cyclical behavior of the labor wedge. It is shown that the tax wedge, which combines both types of taxes, fails in accounting for the countercyclicality of the labor wedge. I then study other factors that may raise the labor wedge during recessions, such as credit frictions on the firms' side and price markups, and find that credit frictions are the primary reasons for this behavior. The empirical findings are consistent with the model-based results; the model with credit frictions successfully generates a countercyclical behavior of the labor wedge, whereas the model without credit frictions does not.

The impact of taxes and administrative activities of SMEs on their performance

“…The authors concluded that both the tax structure and mainly the economic growth strongly affect the tax and administrative burden laid on enterprises in India. Enterprises showing economic growth and subject to changing tax burden find tax burden less difficult to handle [7,8,9]. The question of whether an enterprise´s ability to pay tax is affected by the amount of corporate income was addressed by a hypothesis claiming that tax burden is more demanding with a higher income.…”