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Optimal Tax Policy and Wage Subsidy in an Imperfectly Competitive Economy

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  • Selim, Sheikh

    ()
    (Cardiff Business School)

Abstract

In an imperfectly competitive economy with direct and indirect taxes, the first best wage subsidy overcompensates workers and provides the incentive to misreport working hours. We show that in the second best optimum where the government cannot use a wage subsidy, the optimal policy is to tax labour income at a zero rate. This policy is optimal because it minimizes the incentive to misreport working hours.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2010/15.

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Length: 9 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:cdf:wpaper:2010/15

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Keywords: Optimal Taxation; Ramsey Problem; Wage Subsidy;

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  1. Jang-Ting Guo & Kevin J. Lansing, 1998. "Optimal taxation of capital income with imperfectly competitive product markets," Working Papers in Applied Economic Theory 98-04, Federal Reserve Bank of San Francisco.
  2. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
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