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When applied to the most responsive segments of
the labor market, tax policy can increase lifetime earnings and
employment
With aging populations and increased demands on
government revenue, countries need to boost employment and earnings. Tax
policy should focus on labor market entry and retirement. Those are the
points where labor supply is most responsive to tax incentives, which can
enhance the flow into work of people leaving school and women with young
children and can prolong employment among older workers. Human capital
policy has a complementary role in improving the payoff to work and ensuring
that earnings hold up longer over a lifetime.
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Unemployment insurance generosity should be
greater when unemployment is high—and vice versa
High unemployment and its social and economic
consequences have lent urgency to the question of how to improve
unemployment insurance in bad times without jeopardizing incentives to work
or public finances in the medium term. A possible solution is a rule-based
system that improves the generosity of unemployment insurance (replacement
rate, benefit duration, eligibility conditions) when unemployment is high
and reduces the generosity when it is low.
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Despite their theoretical benefits, flat taxes
have been tried only in a few formerly socialist countries
The potential economic outcomes resulting from a
flat rate of income tax have been the subject of an ongoing academic and
political debate. Many observers have suggested that the introduction of a
flat tax would be beneficial for a country’s economy, having a positive
influence on the labor market and the gross domestic product by enhancing
incentives to work, save, invest, and take risks. A flat tax also
significantly simplifies income taxation which increases tax compliance and
reduces tax planning, avoidance, and evasion. However, despite flat taxes
being on the political agenda in many countries, in practice their
implementation has mostly been restricted to the transition economy
countries of Eastern Europe. There is no one single flat tax system in place
in these countries though; one rate does not fit all.
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