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Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?

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  • Roed, Knut
  • Strom, Steinar

Abstract

Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite "yes." But at least three forces may pull in the other direction. First, low-wage workers may on average have more elastic labour supply schedules than high-wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in non-competitive labour markets, progressive taxes may encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre-tax wages, and hence increase the demand for low-skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade-off between equality and efficiency is not always inevitable. Copyright 2002 by Blackwell Publishers Ltd

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  • Roed, Knut & Strom, Steinar, 2002. " Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 77-110, February.
  • Handle: RePEc:bla:jecsur:v:16:y:2002:i:1:p:77-110
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    Cited by:

    1. Dagsvik, John K. & Locatelli, Marilena & Strøm, Steinar, 2006. "Simulating labor supply behavior when workers have preferences for job opportunities and face nonlinear budget constraints," Memorandum 20/2006, Oslo University, Department of Economics.
    2. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Experimental evidence on the relationship between tax evasion opportunities and labor supply," European Economic Review, Elsevier, vol. 68(C), pages 48-70.
    3. Sæther, Erik Magnus, 2009. "A Discrete Choice Analysis of Norwegian Physicians’ Labor Supply and Sector Choice," HERO On line Working Paper Series 2003:19, Oslo University, Health Economics Research Programme.
    4. Joël Hellier & Stéphane Lambrecht, 2012. "Inequality, growth and welfare: The main links," Working Papers 258, ECINEQ, Society for the Study of Economic Inequality.
    5. M. Fort & N. Schneeweis & R. Winter-Ebmer, 2011. "More Schooling, More Children: Compulsory Schooling Reforms and Fertility in Europe," Working Papers wp787, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2016. "Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 454-489, June.
    7. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, EconWPA.
    8. Philipp Doerrenberg & Andreas Peichl, 2014. "The impact of redistributive policies on inequality in OECD countries," Applied Economics, Taylor & Francis Journals, vol. 46(17), pages 2066-2086, June.
    9. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, vol. 95(11), pages 1523-1537.
    10. Di Tommaso, M.L. & Strøm, S. & Sæther, E.M., 2009. "Nurses wanted: Is the job too harsh or is the wage too low?," Journal of Health Economics, Elsevier, vol. 28(3), pages 748-757, May.
    11. Rydqvist, Kristian & Schwartz, Steven T. & Spizman, Joshua D., 2014. "The tax benefit of income smoothing," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 78-88.
    12. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    13. Jörg Lingens & Klaus Wälde, 2009. "Pareto-Improving Unemployment Policies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 220-245, June.
    14. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    15. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques.
    16. Wennberg, Karl & Stadin, Evelina & Bergström, Andreas, 2014. "How policy could handle workplace digitization," Ratio Working Papers 237, The Ratio Institute.
    17. Diane Aubert & Mireille Chiroleu-Assouline, 2017. "Environmental Tax Reform and Income Distribution with Imperfect Heterogeneous Labor Markets," PSE Working Papers halshs-01550000, HAL.
    18. Margit Schratzenstaller, 2007. "WIFO White Paper: Public Sector Contribution to Growth," WIFO Monatsberichte (monthly reports), WIFO, vol. 80(6), pages 509-526, June.
    19. Christian E. Weller & Manita Rao, 2008. "Can Progressive Taxation Contribute to Economic Development?," Working Papers wp176, Political Economy Research Institute, University of Massachusetts at Amherst.
    20. Colombino Ugo & Locatelli Marilena & Narazani Edlira & O'Donoghue Cathal, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise With a Microeconometric Model," Basic Income Studies, De Gruyter, vol. 5(1), pages 1-31, September.
    21. Mathias, HUNGERBUEHLER, 2004. "Tax Progression in Imperfect Labour Markets : A Survey," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    22. Sidibe, Yoro & Williams, Timothy O., 2015. "Valuation of water in large-scale agricultural land investments in Mali: Efficiency and equity trade-offs," 2015 Conference, August 9-14, 2015, Milan, Italy 212235, International Association of Agricultural Economists.
    23. Colombino, Ugo & Locatelli, Marilena & Narazani, Edlira & O'Donoghue, Cathal & Shima, Isilda, 2008. "Behavioural and welfare effects of basic income policies: a simulation for European countries," EUROMOD Working Papers EM5/08, EUROMOD at the Institute for Social and Economic Research.
    24. Isilda Mara & Edlira Narazani, 2011. "The Effects of Flat Tax on Inequality and Informal Employment: The Case of Albania," wiiw Balkan Observatory Working Papers 94, The Vienna Institute for International Economic Studies, wiiw.

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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy

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