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Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses

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  • Laurence Jacquet
  • Etienne Lehmann
  • Bruno Van der Linden

Abstract

This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework where (voluntary) nonparticipation and (involuntary) unemployment are endogenous. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-03/cesifo1_wp3779.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3779.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3779

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Keywords: optimal taxation; labor market frictions; unemployment; Kalai solution;

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References

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  1. Boone, J. & Bovenberg, A.L., 2000. "Optimal Labour Taxation and Search," Discussion Paper 2000-17, Tilburg University, Center for Economic Research.
  2. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  3. Philippe Chone & Guy Laroque, 2001. "Optimal Incentives for Labor Force Participation," Working Papers 2001-26, Centre de Recherche en Economie et Statistique.
  4. l’Haridon, Olivier & Malherbet, Franck & Pérez-Duarte, Sébastien, 2011. "Does bargaining matter in the small firm's matching model?," Working Paper Series 1359, European Central Bank.
  5. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. repec:bla:restud:v:73:y:2006:i:3:p:743-767 is not listed on IDEAS
  7. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  8. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2005. "Optimal Redistributive Taxation in a Search Equilibrium Model," IZA Discussion Papers 1460, Institute for the Study of Labor (IZA).
  9. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  10. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," OECD Social, Employment and Migration Working Papers 28, OECD Publishing.
  11. Hungerbühler, Mathias & Lehmann, Etienne, 2009. "On the optimality of a minimum wage: New insights from optimal tax theory," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 464-481, April.
  12. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, vol. 95(11), pages 1523-1537.
  13. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
  14. Choné, Philippe & Laroque, Guy, 2011. "Optimal taxation in the extensive model," Journal of Economic Theory, Elsevier, vol. 146(2), pages 425-453, March.
  15. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
  16. Meghir, Costas & Phillips, David, 2008. "Labour Supply and Taxes," IZA Discussion Papers 3405, Institute for the Study of Labor (IZA).
  17. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2000. "Redistribution and Employment Policies with Endogenous Unemployment," Cahiers de recherche CREFE / CREFE Working Papers 121, CREFE, Université du Québec à Montréal.
  18. Paul Beaudry & David A. Green & Benjamin M. Sand, 2010. "How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation," NBER Working Papers 15790, National Bureau of Economic Research, Inc.
  19. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, vol. 45(7), pages 1623-30, October.
  20. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  21. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
  22. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  23. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  24. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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Cited by:
  1. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2014. "The own-wage elasticity of labor demand: A meta-regression analysis," ZEW Discussion Papers 14-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.

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