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A Post Keynesian Perspective on Twenty-First Century Economic Problems

Edited by Paul Davidson

This book explores key economic problems and new policies for the global economy of the 21st century. The contributors discuss to what extent past policy errors were due to the incompetence of policymakers, and highlight problems including: international payments imbalances and currency crises, volatile security markets, inflation, achieving full employment, income distribution and alleviating individuals and nations of poverty.
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Chapter 12: VAT reduction for consumptionoriented, labor-intensive services in the European Union: a stimulus to employment? The case of Germany

Hubert Hieke


Hubert Hieke INTRODUCTION Moonlighting and illegal employment have caused severe strains on the German economy. Some economists estimate that annual untaxed total revenue accumulated from these activities amounts to more than DM500 billion or 250 billion euros (Kornhardt 1998; Schneider and Ernste 2000). At the same time, the German economy has been facing persistent high levels of unemployment, and labor-intensive, consumption-oriented sectors in particular have been confronted with an increasing tax burden and labor costs, including those of fringe benefits. Studies suggest that relative prices for services that are good substitutes for those offered by the underground economy have risen considerably, and that demand for a wide range of products offered by the formal sector has consequently declined (Haase and Alefs 1997). Although partial measures, such as a value-added tax (VAT) reduction for labor-intensive services, are usually considered inefficient and rather inappropriate in stimulating overall employment, a VAT reduction might reduce the gap between prices charged to consumers by the formal sector relative to those charged for similar services by the underground economy. If this was the case, employment in the formal sector might increase due to substitution effects between the two competing sectors. The current debate about the impact of a possible VAT reduction on specific labor-intensive goods and services that are primarily demanded by private consumers has been controversial, particularly because the potential net effects on tax revenue and employment are hard to quantify, and no reliable data exist on either...

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