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Optimal Redistributive Taxation in a Search Equilibrium Model

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Author Info

  • Hungerbühler, Mathias

    ()
    (University of Namur)

  • Lehmann, Etienne

    ()
    (CRED, Université Panthéon Assas Paris 2)

  • Parmentier, Alexis

    ()
    (University of Evry)

  • Van der Linden, Bruno

    ()
    (IRES, Université catholique de Louvain)

Abstract

This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to their efficient values, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1460.

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Length: 35 pages
Date of creation: Jan 2005
Date of revision:
Publication status: published in: Review of Economic Studies, 2006, 73(3), 743-767
Handle: RePEc:iza:izadps:dp1460

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Keywords: optimal income taxation; unemployment; wage bargaining; matching;

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