Job creators, job creation, and the tax code

This paper considers the role of the tax code in determining income dispersion and vacancy creation. A “span-of-control” model is embedded into a search and matching environment. A cut to the tax on profits in isolation improves job creation and reduces before-tax income inequality. The impact of a budget-balancing increase in the wage tax depends on the bargaining power of firms. When it is high, firms pick up the lion's share of the tax burden. The tax acts like a barrier to entry: it benefits large firms at the expense of marginal ones. Net effects are an increase in unemployment and before-tax income dispersion. Low firm bargaining power means workers pick up more of the tax burden. It acts like a subsidy to entrepreneurship reinforcing the impact of the profit tax reduction. Taxes on the returns to capital leave everyone worse off.