Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?
AbstractDoes 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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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economic Surveys.
Volume (Year): 16 (2002)
Issue (Month): 1 (February)
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Other versions of this item:
- Roed,K. & Strom,S., 1999. "Progressive taxes and the labour market : is the trade-off between equality and efficiency inevitable?," Memorandum 19/1999, Oslo University, Department of Economics.
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
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