The impact of tax reforms on unemployment in a SMOPEC

This paper analyzes revenue-neutral tax reforms for a small open economy wh ich is constrained to a balanced current account and whose producers have m arker power on the world market. We consider origin-based and destination-b ased commodity taxes as well as taxes on income. the payroll, and on an imp orted factor of production. Our main findings are the following. First, the strength. and for some parameter constellations, even the sign of the empl oyment effect of tax reforms varies with the degree of openness of the econ omy. Second. the indeterminacy of the sign of the employment effect crucial ly hinges on the presence of an internationally mobile factor. The central mechanism underlying our results are adjustments of the real exchange rate which have repercussions on wage and price setting and therefore on employm ent.