Socio-economic consequences and problems of labor taxation

Abstract

The development of each state and economic growth are highly related to the number of factors of production such as labor and capital along with higher productivity of utilizing them. Frequently, high unemployment rate (with small labor force participation) and significant “shadow” employment accused of the high tax burden on labor. Moreover, some assumptions exist that decrease in personal income tax or social security contributions paid by employee induce an increase in labor supply, and a decrease of payroll taxes increment the labor demand. However, the impact of the tax change on labor market depends on the behavioral responses of economic “players” estimated by elasticities. The higher elasticity of supply or demand means higher sensitivity to the tax changes, with relatively less elastic side bearing the higher tax burden. We discussed the significant problems in the field of labour taxation and socio-economic consequences using the experience of Denmark, Estonia, Germany, Poland, Slovakia, and Ukraine. Unscrambling the decomposition of labour taxation, factors affecting labour supply and labour demand, tax incidence, employment problems and groups vulnerable to these problems. The main methods: a synthesis for primary concepts (labour taxation, take-home pay, tax wedge, tax incidence, payroll taxes); deduction; induction method for conclusions; statistical methods for analyzing revenues, structure, and composition of labour taxation between selected countries. Anyway, taxes discourage both labor demand (by raising labor costs to employers) and labor supply (by lowering the real consumption wage of workers). They create a “tax wedge” between labor cost to the employer and the worker’s take-home pay and thereby reduce both employment and economic growth. We tried to discover the issues above concerning existing research data. However, the investigation scale needs to be expanded for the thorough look and deep awareness of taxation concepts and problems. Keywords: taxes, tax system, labor taxation, take-home pay, tax wedge, payroll taxes, gross salary, social security contributions, personal income tax, implicit tax rate