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Voting on the tax rate when attitude to risk depends on skill heterogeneity

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  • Francesco Farina

    ()

  • Fulvio Fontini

    ()

Abstract

We set a model in which a population of individuals is segmented in the labour market into two groups: high-skill workers and low-skill ones. Risk exposure consists of a macroeconomic employment risk for which the two groups have diverging probabilities. We investigate how risk affects preferences on the optimal level of the tax rate and show that a crucial role is played by workers’ risk-attitude in advanced and backward economies. In the former, overall production increases as low-skills’ working perspectives worsen, while the opposite is true for the latter. In the first case, a crucial role is played by low-skill workers, whose behaviour depends on their degree of risk aversion: low-skill high-risk averse individuals will chose a lower tax rate as their risk rises, while the opposite is true for both the low-skill low-risk-averse workers and the high-skill ones. In the case of backward economies, both the high-skills high-risk-averse and the low-skill individuals choose a lower tax rate as their risk increases, while the opposite is true for high-skills low risk-averse workers.

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Paper provided by Department of Economic Policy, Finance and Development (DEPFID), University of Siena in its series Department of Economic Policy, Finance and Development (DEPFID) University of Siena with number 0109.

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Date of creation: Jan 2009
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Handle: RePEc:usi:depfid:0109

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Keywords: Constant Relative Risk aversion; Optimal Tax Rate; Workers’ Heterogeneity.;

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  1. Hans-Werner Sinn & Wolfgang Ochel, 2003. "Social Union, Convergence and Migration," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 869-896, December.
  2. Hans-Werner Sinn, 2002. "The New Systems Competition," NBER Working Papers 8747, National Bureau of Economic Research, Inc.
  3. Bénabou, Roland & Ok, Efe, 1997. "Social Mobility and the Demand for Redistribution : the POUM Hypothesis," IDEI Working Papers 78, Institut d'Économie Industrielle (IDEI), Toulouse, revised 1999.
  4. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  5. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
  6. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  7. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
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