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Optimal income taxation with endogenous participation and search unemployment

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  • Lehmann, Etienne
  • Parmentier, Alexis
  • Van Der Linden, Bruno

Abstract

We characterize optimal redistributive taxation when individuals are heterogeneous in their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. Average tax rates are increasing at the optimum. This shifts wages below their laissez faire value and distorts labor demand upwards. The marginal tax rate is positive at the top of the skill distribution even when the latter is bounded. These results are analytically shown under a Maximin objective when the elasticity of participation is decreasing in the skill level and are numerically confirmed under a more general objective. Under the Maximin, above approximately $20,000 per year, our model recommends higher marginal tax rates than a comparable competitive setting.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1523-1537

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1523-1537

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Non-linear taxation; Redistribution; Adverse selection; Random participation; Unemployment; Labor market frictions.;

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Cited by:
  1. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  2. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2013. "Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity," CESifo Working Paper Series 4348, CESifo Group Munich.
  3. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," IZA Discussion Papers 4832, Institute for the Study of Labor (IZA).
  4. Laurence Jacquet & Etienne Lehmann & Bruno Van der Linden, 2012. "Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses," CESifo Working Paper Series 3779, CESifo Group Munich.

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