Opportunities for All by OECD

Author:OECD
Language: eng
Format: epub
Tags: Economics
Publisher: OECD Publishing
Published: 2018-05-28T16:00:00+00:00

Supporting formal working arrangements;

Supporting skills upgrading, both at the level of the individual and the firm; and

Implementing programs to promote local supply-chain deepening and knowledge transfers.

Making labour markets more inclusive through taxation

Tax policies can help to make labour markets more inclusive. A key priority for many OECD countries should be to reduce structural unemployment. This should include continuing to reduce marginal tax rates for those with low skills and low propensity to work. This could be achieved through an expansion of in-work benefits such as earned-income tax credits (EITCs). A number of OECD countries would also benefit from reductions in payroll taxes, and shifts in the burden of social protection financing away from social security contributions (SSCs) and onto other tax bases. EITCs and SSC reductions that lower the labour tax wedge and therefore raise after-tax earnings are particularly effective for workers that tend to have high labour supply elasticities including young and older workers, women, low-skilled, and single-parent households (Brys et al., 2016) (Box 1.2).

Reducing tax rates for low-income workers can reduce regional inequalities. Apart from raising employment, reductions in effective tax rates at low incomes (Figure 2.19) can reduce regional inequality and provide benefits to firms that employ large numbers of low-skilled workers, benefiting these workers in turn (Saez et al., 2017). When considering this, the design of EITCs and other in-work benefits matters as well their integration with other labour market policies such as minimum wages, and the levels and eligibility conditions of unemployment benefits (Immervoll and Pearson, 2009).

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