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A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

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  • Mathias HUNGERBUHLER

    ()
    (FUNDP, University of Namur)

  • Etienne LEHMANN

    ()
    (CREST, IZA, IDEP and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches économiques et sociales (IRES))

  • Alexis PARMENTIER

    ()
    (EPEE - Université d'Evry, TEPP-CNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches économiques et sociales(IRES))

  • Bruno VAN DER LINDEN

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), FNRS, ERMES-Université Paris 2 and IZA)

Abstract

We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to theire efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010008.

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Length: 25
Date of creation: 18 Mar 2010
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Handle: RePEc:ctl:louvir:2010008

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