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A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

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  • 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

We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to their efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4832.

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Length: 27 pages
Date of creation: Mar 2010
Date of revision:
Publication status: published in: Economie Publique/Public Economics, 2012, 22-23 (1-2), 203-218
Handle: RePEc:iza:izadps:dp4832

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Keywords: unemployment; optimal income taxation; matching;

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  1. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, Elsevier, vol. 89(2-3), pages 395-425, February.
  2. Mathias Hungerb�hler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2006. "Optimal Redistributive Taxation in a Search Equilibrium Model," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 743-767.
  3. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(3), pages 569-587, 07.
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  7. Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," IZA Discussion Papers 3804, Institute for the Study of Labor (IZA).
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