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Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

  • Erkki Koskela
  • Leopold von Thadden
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    We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: (i) taxes on capital and labour are the only available tax instruments for raising revenues and (ii) labour markets are subject to an inefficiency resulting from wage bargaining. If considered in isolation, the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets. Copyright 2008 The Authors.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0475.2008.00428.x
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    Article provided by Verein für Socialpolitik in its journal German Economic Review.

    Volume (Year): 9 (2008)
    Issue (Month): (05)
    Pages: 135-159

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    Handle: RePEc:bla:germec:v:9:y:2008:i::p:135-159
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    1. Kevin J. Lansing, 1998. "Optimal redistributive capital taxation in a neoclassical growth model," Working Papers in Applied Economic Theory 99-01, Federal Reserve Bank of San Francisco.
    2. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
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    6. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 1995. "Supply side interventions and redistribution," Economics Working Papers 115, Department of Economics and Business, Universitat Pompeu Fabra.
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    9. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc.
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    11. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, vol. 60(1), pages 147-151, April.
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