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Optimal asymmetric sector-specific labour taxation in an overlapping generations model

Author

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  • Igor Fedotenkov

    (Russian Presidential Academy of National Economy and Public Administration (RANEPA)
    Bank of Lithuania)

Abstract

This paper presents a simple rule for optimal asymmetric labour taxation and subsidization in a two-sector model with logarithmic utilities and Cobb–Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on whether the economy is dynamically efficient or inefficient, it may be optimal to tax or subsidize labour in the sectors. Under dynamic inefficiency, it is optimal to tax the investment-goods sector and a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation. In appendix, we also address the cases of capital taxation/subsidisation and value-added taxes.

Suggested Citation

  • Igor Fedotenkov, 2019. "Optimal asymmetric sector-specific labour taxation in an overlapping generations model," Journal of Economics, Springer, vol. 127(1), pages 1-18, June.
    • Handle: RePEc:kap:jeczfn:v:127:y:2019:i:1:d:10.1007_s00712-018-0625-1
    DOI: 10.1007/s00712-018-0625-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Two sectors; Factor mobility; Asymmetric taxation; Optimality; Population ageing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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