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Optimal Taxation And Social Networks

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  • Arbex, Marcelo
  • O'Dea, Dennis

Abstract

We study optimal taxation when jobs are found through a social network. The network determines employment, which workers may influence by engaging in social activities. The network parameters play an important role in determining the economy's employment level and the optimal income tax. The optimal labor income tax depends on both the traditional intensive margin of labor supply and a new extensive margin that depends on the structure of the social network. Social activities that promote social connections are instrumental to acquiring job information; taxation thus discourages both social activities and labor supply, reducing employment. Labor taxes vary positively with labor supply and negatively with employment. When networking is absent, taxes are higher and the economy's employment rate is lower. The optimal capital tax rate is zero, independent of labor market frictions. Social networking reduces job search frictions and is welfare-enhancing.

Suggested Citation

  • Arbex, Marcelo & O'Dea, Dennis, 2014. "Optimal Taxation And Social Networks," Macroeconomic Dynamics, Cambridge University Press, vol. 18(8), pages 1683-1712, December.
    • Handle: RePEc:cup:macdyn:v:18:y:2014:i:08:p:1683-1712_00
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    Cited by:

    1. Arbex, Marcelo & Caetano, Sidney & O’Dea, Dennis, 2016. "The implications of labor market network for business cycles," Economics Letters, Elsevier, vol. 144(C), pages 37-40.
    2. André, Keven R.A. & Arbex, Marcelo & Corrêa, Márcio V., 2023. "The economic implications of a network SIR-Macro model of epidemics," Economics Letters, Elsevier, vol. 225(C).

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