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Optimal Capital Taxation and Labor Market Search

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  • David Domeij

    (Stockholm School of Economics)

Abstract

In this paper I study the nature of optimal factor income taxation in a neoclassical growth model where search frictions on the labor marker generate unemployment. I show that the introduction of search frictions changes the Chamley-Judd result of zero capital taxation as follows: if the government is constrained to capital and labor taxation, the optimal capital tax is in general non-zero, but if the government has access to other tax instruments the Chamley.Judd result survives. Quantitatively, the optimal capital tax is small, in the range of -8 to 8 percent. The welfare costs of being constrained can, however, be quite large. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.01.011
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 3 (July)
Pages: 623-650

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Handle: RePEc:red:issued:v:8:y:2005:i:3:p:623-650

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Keywords: Optimal taxation; Search externalities;

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References

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Citations

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Cited by:
  1. Sanjay K. Chugh, 2006. "Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 683-714, October.
  2. Marcelo Arbex & Enlinson Mattos, 2013. "Optimal Sales Tax Rebates and Tax Enforcement Consumers," Working Papers, University of Windsor, Department of Economics 1302, University of Windsor, Department of Economics.
  3. repec:dgr:uvatin:2008024 is not listed on IDEAS
  4. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency," Computing in Economics and Finance 2006, Society for Computational Economics 222, Society for Computational Economics.
  5. Keith Kuester & Philip Jung, 2012. "Optimal Labor-Market Policy in Recessions," 2012 Meeting Papers, Society for Economic Dynamics 186, Society for Economic Dynamics.
  6. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, Elsevier, vol. 61(C), pages 28-42.
  7. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers, Carleton University, Department of Economics 13-09, Carleton University, Department of Economics.
  8. Volker Grossmann & Panu Poutvaara, 2005. "Pareto-Improving Bequest Taxation," CESifo Working Paper Series 1515, CESifo Group Munich.
  9. Linnemann, Ludger & Schabert, Andreas, 2012. "Optimal government spending with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(5), pages 795-811.
  10. Erkki Koskela & Leopold von Thadden, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 9, pages 135-159, 05.
  11. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers, Carleton University, Department of Economics 13-08, Carleton University, Department of Economics.
  12. David M. Arseneau & Sanjay K. Chugh & André Kurmann, 2009. "Asset Value Constraints in Models of Incomplete Factor Taxation," Cahiers de recherche, CIRPEE 0949, CIRPEE.
  13. Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(8), pages 1392-1402, August.

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