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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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  • Etienne LEHMANN

    (Crest)

  • Alexis PARMENTIER

    (Crest)

  • Bruno VAN DER LINDEN

    (Crest)

Abstract

We characterize optimal redistributive taxation when individuals are heterogeneous in their skillsand their values of non-market activities. Search-matching frictions on the labor markets createunemployment. Wages, labor demand and participation are endogenous. The government onlyobserves wage levels. Under a Maximin objective, if the elasticity of participation decreasesalong the distribution of skills at the optimum, the average tax rate is increasing, marginaltax rates are positive everywhere, while wages, unemployment rates and participation rates aredistorted downwards compared to their laissez-faire values. Under a general utilitarian objective,numerical simulations suggest that the downward distortions of wages and unemploymentremain. However, the optimal policy then induces upward distortions of participation.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2009-01.

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Length: 41
Date of creation: 2009
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Handle: RePEc:crs:wpaper:2009-01

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Cited by:
  1. Mathias Hungerbuhler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," Working Papers 2010-13, Centre de Recherche en Economie et Statistique.
  2. Frederic Gavrel, 2014. "Participation, Recruitment Selection, and the Minimum Wage," Working Papers halshs-00972289, HAL.
  3. Etienne LEHMANN & Claudio LUCIFORA & Simone MORICONI & Bruno VAN DER LINDEN, 2013. "Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  4. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2011. "Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses," IZA Discussion Papers 5642, Institute for the Study of Labor (IZA).
  5. Laurence Jacquet & Etienne Lehmann & Bruno Linden, 2014. "Optimal income taxation with Kalai wage bargaining and endogenous participation," Social Choice and Welfare, Springer, vol. 42(2), pages 381-402, February.
  6. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  7. 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, vol. 21(2), pages 198-227, April.

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