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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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  • Etienne Lehmann
  • Alexis Parmentier
  • Bruno Van der Linden

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3324.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3324

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Keywords: non-linear taxation; redistribution; adverse selection; random participation; unemployment; labor market frictions;

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References

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Citations

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Cited by:
  1. Frédéric Gavrel, 2014. "Participation, Recruitment Selection, and the Minimum Wage," Working Papers, HAL halshs-00948453, HAL.
  2. Bruno Jacquet & Etienne Lehmann & Bruno Van der Linden, 2011. "Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses," Working Papers, Centre de Recherche en Economie et Statistique 2011-15, Centre de Recherche en Economie et Statistique.
  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. Brigitte Baalen & Tobias Müller, 2014. "Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach," International Tax and Public Finance, Springer, Springer, vol. 21(2), pages 198-227, April.
  5. Lehmann, Etienne & Lucifora, Claudio & Moriconi, Simone & Van der Linden, Bruno, 2014. "Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity," IZA Discussion Papers 8276, Institute for the Study of Labor (IZA).
  6. Laurence Jacquet & Etienne Lehmann & Bruno Linden, 2014. "Optimal income taxation with Kalai wage bargaining and endogenous participation," Social Choice and Welfare, Springer, Springer, vol. 42(2), pages 381-402, February.
  7. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, IEF, vol. 200(1), pages 15-39, March.

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