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Optimal income taxation with endogenous participation and search unemployment

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  • Etienne, LEHMANN
  • Alexis, PARMENTIER
  • Bruno, VAN DER LINDEN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

This paper characterizes the optimal redistributive taxation when individuals are heterogeneous in two exogenous dimensions : Their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. The government only observed wage levels. Under a Maximin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-farie values. A simulation exercise confirms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.

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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 2008036.

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Length: 41
Date of creation: 01 Dec 2008
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Handle: RePEc:ctl:louvec:2008036

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Keywords: Non-linear taxation; Redistribution; Adverse selection; Random participation; Unemployment; Labor market frictions;

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Citations

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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. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  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," TEPP Working Paper 2013-05, TEPP.
  4. Frédéric Gavrel, 2014. "Participation, Recruitment Selection, and the Minimum Wage," Working Papers halshs-00948453, HAL.
  5. 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).
  6. 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.
  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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