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Optimal Dynamic Labor Taxation

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  • BASU, PARANTAP
  • RENSTRÖM, THOMAS I.

Abstract

We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.

Suggested Citation

  • Basu, Parantap & Renström, Thomas I., 2007. "Optimal Dynamic Labor Taxation," Macroeconomic Dynamics, Cambridge University Press, vol. 11(5), pages 567-588, November.
    • Handle: RePEc:cup:macdyn:v:11:y:2007:i:05:p:567-588_06
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    Cited by:

    1. Thomas I. Renström & Luca Spataro, 2021. "Optimal taxation in an endogenous growth model with variable population and public expenditure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 639-659, August.
    2. Spataro, Luca & Renström, Thomas I., 2012. "Optimal taxation, critical-level utilitarianism and economic growth," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 727-738.

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