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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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Related research

Keywords: Optimal taxation; Search externalities;

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References

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Citations

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Cited by:
  1. Volker Grossmann & Panu Poutvaara, 2009. "Pareto-improving bequest taxation," International Tax and Public Finance, Springer, vol. 16(5), pages 647-669, October.
  2. Sanjay K. Chugh, 2006. "Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices," Computing in Economics and Finance 2006 228, Society for Computational Economics.
  3. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.
  4. Keith Kuester & Philip Jung, 2012. "Optimal Labor-Market Policy in Recessions," 2012 Meeting Papers 186, Society for Economic Dynamics.
  5. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
  6. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency," 2006 Meeting Papers 568, Society for Economic Dynamics.
  7. Marcelo Arbex & Enlinson Mattos, 2013. "Optimal Sales Tax Rebates and Tax Enforcement Consumers," Working Papers 1302, University of Windsor, Department of Economics.
  8. 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, vol. 34(8), pages 1392-1402, August.
  9. David M. Arseneau & Sanjay K. Chugh & André Kurmann, 2009. "Asset Value Constraints in Models of Incomplete Factor Taxation," Cahiers de recherche 0949, CIRPEE.
  10. repec:dgr:uvatin:2008024 is not listed on IDEAS
  11. Linnemann, Ludger & Schabert, Andreas, 2012. "Optimal government spending with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 795-811.
  12. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
  13. Erkki Koskela & Leopold von Thadden, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, Verein für Socialpolitik, vol. 9, pages 135-159, 05.

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