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Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

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  • Erkki Koskela
  • Leopold von Thadden

Abstract

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arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets.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.

Suggested Citation

  • Erkki Koskela & Leopold von Thadden, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, Verein für Socialpolitik, vol. 9, pages 135-159, May.
  • Handle: RePEc:bla:germec:v:9:y:2008:i::p:135-159
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    References listed on IDEAS

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    Cited by:

    1. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2011. "The distributional consequences of tax reforms under market distortions," SIRE Discussion Papers 2011-73, Scottish Institute for Research in Economics (SIRE).
    2. Wei Jiang, 2014. "Optimal taxation and labour wedge in models with equilibrium unemployment," Studies in Economics 1407, School of Economics, University of Kent.
    3. Erkki Koskela & Panu Poutvaara, 2008. "Outsourcing and Labor Taxation in Dual Labor Markets," CESifo Working Paper Series 2333, CESifo Group Munich.
    4. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
    5. Wei Jiang, 2014. "Tax Reforms in Search-and-Matching Models with Heterogeneous Agents," Studies in Economics 1414, School of Economics, University of Kent.

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