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Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?

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Author Info
 Roed, Knut
Strom, Steinar

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Abstract

Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite "yes." But at least three forces may pull in the other direction. First, low-wage workers may on average have more elastic labour supply schedules than high-wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in non-competitive labour markets, progressive taxes may encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre-tax wages, and hence increase the demand for low-skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade-off between equality and efficiency is not always inevitable. Copyright 2002 by Blackwell Publishers Ltd

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Article provided by Blackwell Publishing in its journal Journal of Economic Surveys.

Volume (Year): 16 (2002)
Issue (Month): 1 (February)
Pages: 77-110
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Handle: RePEc:bla:jecsur:v:16:y:2002:i:1:p:77-110

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lommerud, Kjell Erik & Sandvik, Bjorn & Staume, Odd Rune, 2003. "Good Jobs, Bad Jobs and Redistribution," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Sæther, Erik Magnus, 2009. "A Discrete Choice Analysis of Norwegian Physicians’ Labor Supply and Sector Choice," HERO On line Working Paper Series 2003:19, Oslo University, Health Economics Research Programme. [Downloadable!]
  3. John K. Dagsvik, Marilena Locatelli and Steinar Strøm, 2006. "Simulating labor supply behavior when workers have preferences for job opportunities and face nonlinear budget constraints," Discussion Papers 488, Research Department of Statistics Norway. [Downloadable!]
    Other versions:
  4. Jörg Lingens & Klaus Wälde, 2006. "Pareto-Improving Unemployment Policies," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Etienne Lehmann & Alexis Parmentier & Bruno van der Linden, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," IDEP Working Papers 0805, Institut d'economie publique (IDEP), Marseille, France, revised 01 Sep 2008. [Downloadable!]
    Other versions:
  6. Frederick VAN DER PLOEG, 2004. "DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets," Economics Working Papers ECO2004/11, European University Institute. [Downloadable!]
  7. Rolf Aaberge & Ugo Colombino, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," IZA Discussion Papers 2468, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Mathias, HUNGERBUEHLER, 2004. "Tax Progression in Imperfect Labour Markets : A Survey," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  9. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
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