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When to Tax Labour?

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  • Basu, Parantap
  • Renström, Thomas I
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    Abstract

    We analyze optimal dynamic taxation when labor supply is indivisible, as in Hansen (1985) and Rogerson (1988). Markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this extrinsic income uncertainty. The optimal wage tax is zero in both the short and long run only when leisure is neutral. If leisure is normal (inferior), labor should be taxed (subsidized). We further derive a wide range of preferences, including HARA, which encompasses normal and non-normal leisure. For those preferences we characterize the dynamic paths of the wage tax.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3456.

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    Date of creation: Jul 2002
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    Handle: RePEc:cpr:ceprdp:3456

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    Keywords: dynamic taxation; indivisible labour; optimal taxation;

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    1. Gary D. Hansen & Thomas J. Sargent, 1987. "Straight Time and Overtime in Equilibrium," UCLA Economics Working Papers 455, UCLA Department of Economics.
    2. Jeremy Greenwood & Gregory W. Huffman, 1988. "On Modelling the Natural Rate of Unemployment with Indivisible Labour," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 587-609, August.
    3. Casey B. Mulligan, 1999. "Microfoundations and Macro Implications of Indivisible Labor," NBER Working Papers 7116, National Bureau of Economic Research, Inc.
    4. Chamley, Christophe, 1985. "Efficient Taxation in a Stylized Model of Intertemporal General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 451-68, June.
    5. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
    6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    7. Chan, Louis Kuo Chi, 1983. "Uncertainty and the neutrality of government financing policy," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 351-372.
    8. Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-88, June.
    9. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
    10. Karl Shell & Randall Wright, 1991. "Indivisibilities, lotteries, and sunspot equilibria," Staff Report 133, Federal Reserve Bank of Minneapolis.
    11. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    12. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    13. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-91, September.
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