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Optimal labour taxation and search

  • Boone, Jan
  • Bovenberg, Lans

This paper explores the optimal role of the tax system in alleviating labour-market imperfections, raising revenue, and correcting the income distribution. For this purpose, the standard search model of the labour market is extended by introducing non-linear vacancy costs due to scarce entrepreneurial talent and by allowing for arbitrage between being a worker and being an entrepreneur. We study how these extensions affect the following three major implications of the standard model: (1) only the ad valorem component of the wage tax should be employed to raise revenue; (2) the optimal tax system should not distort labour-market tightness; (3) the tax system cannot redistribute from workers to entrepreneurs.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 85 (2002)
Issue (Month): 1 (July)
Pages: 53-97

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Handle: RePEc:eee:pubeco:v:85:y:2002:i:1:p:53-97
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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