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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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  • 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 the optimal redistributive taxation when individuals are heterogeneous 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 Maximin 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3804.

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Length: 41 pages
Date of creation: Oct 2008
Date of revision:
Publication status: published in: Journal of Public Economics, 2011, 95 (11-12), 1523-1537
Handle: RePEc:iza:izadps:dp3804

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

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Citations

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Cited by:
  1. Frederic Gavrel, 2014. "Participation, Recruitment Selection, and the Minimum Wage," TEPP Working Paper 2014-02, TEPP.
  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," TEPP Working Paper 2013-05, TEPP.
  3. 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.
  4. 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.
  5. Mathias HUNGERBUHLER & Etienne LEHMANN & Alexis PARMENTIER & Bruno VAN DER LINDEN, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  7. 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.

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