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Abstract

We analyse the question of optimal taxation in a dual economy, when the government is concerned about the distribution of labour income. Income inequality is caused by the presence of sunk capital investments, which creates a 'good jobs' sector due to the capture of quasi-rents by trade unions. We find that whether the government should subsidise or tax investments is crucially dependent on union bargaining strength. If unions are weak, the optimal tax policy implies a combination of investment taxes and progressive income taxation. On the other hand, if unions are strong, we find that the best option for the government is to use investment subsidies in combination with either progressive or proportional taxation, the latter being the optimal policy if the government is not too concerned about inequality and if the cost of income taxation is sufficiently high.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 131.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:131

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Web page: http://www.res.org.uk/society/annualconf.asp
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Find related papers by JEL classification:

• H2 - Public Economics - - Taxation, Subsidies, and Revenue
• J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
• J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

This paper has been announced in the following NEP Reports:

• NEP-ALL-2002-07-08 (All new papers)

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Cited by:

1. Mireia Valverde & Gerard Ryan & María Gorjup, 2007. "An Examination of the Quality of Jobs in the Call Center Industry," International Advances in Economic Research, Springer, vol. 13(2), pages 146-156, May.
2. Kessing, Sebastian G. & Konrad, Kai A., 2006. "Union strategy and optimal direct taxation," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 393-402, January.
3. Wälde, Klaus & Lingens, Jörg, 2005. "Pareto - Improving Unemployment Policies," W.E.P. - Würzburg Economic Papers 63, University of Würzburg, Chair for Monetary Policy and International Economics.
   
   • Jörg Lingens & Klaus Wälde, 2009. "Pareto-Improving Unemployment Policies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 220-245, June.
   • Jörg Lingens & Klaus Wälde, 2006. "Pareto-Improving Unemployment Policies," CESifo Working Paper Series 1807, CESifo Group Munich.
   • Jörg Lingens & Klaus Wälde, 2007. "Pareto-Improving Unemployment Policies," Working Papers 2007_34, Business School - Economics, University of Glasgow.
   • Jorg, LINGENS & Klaus, WAELDE, 2005. "Pareto-Improving Unemployment Policies," Discussion Papers (ECON - Département des Sciences Economiques) 2005033, Université catholique de Louvain, Département des Sciences Economiques.
4. Christian Merkl & Dennis J. Snower, 2007. "Escaping the Unemployment Trap � The Case of East Germany," Kiel Working Papers 1309, Kiel Institute for the World Economy.
5. Pascal Belan & Martine Carré & Stéphane Gregoir, 2007. "Subsidizing low-skilled jobs in a dual labor market," THEMA Working Papers 2007-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
   
   • Belan, Pascal & Carré, Martine & Gregoir, Stéphane, 2010. "Subsidizing low-skilled jobs in a dual labor market," Labour Economics, Elsevier, vol. 17(5), pages 776-788, October.
   • Belan, Pascal & Gregoir, Stéphane & Carré, Martine, . "Subsidizing low-skilled jobs in a dual labor market," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/8134, Université Paris-Dauphine.
6. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
7. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the Unemployment Trap: The Case of East Germany," IZA Discussion Papers 3681, Institute for the Study of Labor (IZA).
   
   • Merkl, Christian & Snower, Dennis J., 2008. "Escaping the unemployment trap: The case of East Germany," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 542-556, December.

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