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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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Author Info

  • Etienne Lehmann

    ()
    (CREST, IZA, IDEP and Université Catholique de Louvain)

  • Alexis Parmentier

    ()
    (EPEE-TEPP - Université d’Evry and Université Catholique de Louvain)

  • Bruno Van Der Linden

    ()
    (IRES - Université Catholique de Louvain, FNRS, ERMES - Université Paris 2 and IZA)

Abstract

This paper characterizes the optimal redistributive taxation when individuals are hetero- geneous 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 observes wage levels. Under a Max- imin 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-faire 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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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-16.

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Length: 40 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-16

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Keywords: Non-linear taxation; redistribution; adverse selection; random participation; unemployment; labor market frictions;

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References

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Citations

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Cited by:
  1. Laurence Jacquet & Etienne lehmann & Bruno Van Der Linden, 2012. "Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses," THEMA Working Papers 2012-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van Der Linden, 2013. "Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity," Working Papers halshs-00870050, HAL.
  3. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  4. 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.
  5. Frederic Gavrel, 2014. "Participation, Recruitment Selection, and the Minimum Wage," TEPP Working Paper 2014-02, TEPP.
  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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