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Optimal Factor Taxation under Wage Bargaining - A Dynamic Perspective

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  • Erkki Koskela
  • Leopold von Thadden
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    Abstract

    We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: i) taxes on capital and labour are the only available tax instruments for raising revenues, and ii) labour markets are subject to a static inefficiency resulting from wage bargaining. If considered in isolation, under broad assumptions the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero-capital tax result in general is no longer valid under imperfectly competitive labour markets.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-01/cesifo_wp836.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 836.

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    Date of creation: 2003
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    Handle: RePEc:ces:ceswps:_836

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    Keywords: optimal taxation; imperfectly competitive labour markets; capital accumulation;

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    24. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, vol. 92(2), pages 417-421, May.
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