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Optimal Non-Linear Income Taxation in Search Equilibrium

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  • Engström, Per

    ()
    (Department of Economics)

Abstract

The paper extends the basic Stiglitz (1982) model of optimal income taxation into general search equilibrium. When we extend the basic taxation model to include a more realistic treatment of the labor market, a number of new interesting mechanisms arise. When wages are fixed we find that a "work hour effect" gives the government incentives to lower the marginal tax rate for both high and low skilled workers. The optimal marginal tax on high skilled is thus negative, and the sign for the low skilled marginal tax is ambiguous. With wages determined by bargaining between firm and worker the results are changed. Both marginal tax rates are of ambiguous sign. The tax systems' effects on the wage formation and the unemployment rates may result in new intricate redistribution channels. Simulations show that the marginal tax rate for high skilled is increasing in the level of redistribution when wages are fixed, but decreasing in the level of redistribution when wages are determined by bargaining.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2002:18.

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Length: 31 pages
Date of creation: 05 Nov 2002
Date of revision:
Handle: RePEc:hhs:uunewp:2002_018

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Keywords: Optimal non-linear income taxation; search; unemployment;

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References

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  1. Holmlund, Bertil, 2000. "Labor Taxation in Search Equililbrium with Home Production," Working Paper Series 2000:1, Uppsala University, Department of Economics.
  2. Joseph E. Stiglitz, 1988. "Pareto Efficient and Optimal Taxation and the New New Welfare Economics," NBER Working Papers 2189, National Bureau of Economic Research, Inc.
  3. Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers dp0361, Centre for Economic Performance, LSE.
  4. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  5. Richard Arnott & Arthur Hosios & Joseph Stiglitz, 1983. "Implicit Contracts, Labour Mobility and Unemployment," Working Papers 543, Queen's University, Department of Economics.
  6. Boadway, Robin & Keen, Michael, 2000. "Redistribution," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 12, pages 677-789 Elsevier.
  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  8. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  9. Joseph E. Stiglitz, 1982. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  10. Dale T. Mortensen & Christopher A. Pissarides, 2002. "Taxes, Subsidies and Equilibrium Labor Market Outcomes," CEP Discussion Papers dp0519, Centre for Economic Performance, LSE.
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Cited by:
  1. Engström, Per, 2007. "Wage Formation and Redistribution," Working Paper Series 2007:12, Uppsala University, Department of Economics.
  2. Engström, Per, 2003. "Unemployment Benefits and Optimal Non-Linear Income Taxation," Working Paper Series 2003:3, Uppsala University, Department of Economics.

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