Work detail

Personal Income Tax and the Rate of Unemployment – Empirical Analysis

Author: Bc. Jan Šolc
Year: 2008 - summer
Leaders: doc. Ing. Ondřej Schneider MPhil., Ph.D.
Work type: Bachelors
Language: English
Pages: 68
Awards and prizes:
Abstract: This bachelor thesis deals with the relation between personal income tax rate and the rate of unemployment. The objective is to analyse this relation using both theoretical and empirical methods. We derive a model that apart from marginal tax rate includes also two other variables, namely the replacement rate and output gap. This model and its variations are tested using panel data of 22 countries, most of them being members of the European Union. Alternatively, all models were tested using a sample of only 20 countries, in which the Slovak Republic and Poland were excluded. Both theoretical and empirical parts of this paper show that the relation between the marginal tax rate and the rate of unemployment is positive and significant. The impact of output gap on the rate of unemployment is found to be negative and also significant. The effect of the replacement rate is revealed to be negative. Furthermore, while studying this variable in detail we find out that it does not influence the rate of unemployment since there is a rather opposite causality. The results of this paper are in accordance with both the predictions of our model and standard economic theory.


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