Does the composition of wage and payroll taxes matter under Nash bargaining?

Using the Nash bargaining approach to wage negotiations this paper shows th at conventional wisdom, according to which the total tax wedge is the sum o f wage and payroll taxes, is valid for equal tax bases, e.g. when the tax e xemption takes the form of a tax credit. However, the equivalence result ce ases to hold when the tax bases are unequal due to tax allowances. In this case a revenue-neutral restructuring of labour taxes towards a narrower tax base decreases the gross wage and is thus good for employment. (C) 1999 El sevier Science S.A. ALI rights reserved.