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The effects of the marginal tax rate in a matching model with endogenous labor supply

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Author Info
Alexis, PARMENTIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

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Abstract

This paper analyzes the effects of the marginal tax rate on unemployment and economic efficiency in a matching model with homogenous agents when wages and working hours are bargained over. I show that the theoretical impact of a higher marginal tax rate on unemployment is ambiguous whatever the instantaneous utility in unemployment i.e. for an utility in unemployment that is either fixed or perfectly indexed on net wages. These results are in sharp contrast with the literature. Numerical simulations applied to France suggest that a higher marginal tax rate generally reduces the unemployment rate but at the expense of lower economic efficiency. The simulations point also out that the relation between the optimal marginal tax rate and the elasticity of labor supply is not monotonic.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006011.

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Length: 38
Date of creation: 01 Apr 2006
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Handle: RePEc:ctl:louvec:2006011

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Related research
Keywords: Matching model; Marginal Tax Rate; Labor supply; Utility in unemployment;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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