The government collects its revenue through consumption tax
(with a rate tc), capital income tax (with a rate tk), and labor income
tax (with a rate tl) on taxable labor income (net after social
security tax). A wage-based social security tax Tsc (wz) is also
collected by the government to provide social security, including
unemployment and medical care benefits (included in UHI), to
workers in the formal sector although it is not self-financed.
In addition to the UHI system, unemployment insurance and
social assistance for maintaining a consumption floor are also
provided for in the economy.
We assume that the government will ensure a balanced budget
at each period. The mathematical details of the government's
budget balance constraint are defined in the appendix.