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Optimal taxation, minimum wage constraint in a model of capital-skill complementarity

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  • Chen, Yunmin
  • Ren, Dongmeng

Abstract

We propose a competitive equilibrium model incorporating taxation and minimum wage constraints in the presence of capital-skill complementarity. The paper mainly addresses how exogenous minimum wage constraints (MWC) impact the optimal progressivity of labor income tax and optimal capital income tax rate. We find the following two results for a steady-state optimal taxes with a binding MWC in an economy with risk averse agents: (i) The capital tax rate is positive, (ii) The labor tax schedule is less progressive in the presence of the MWC than in its absence.

Suggested Citation

  • Chen, Yunmin & Ren, Dongmeng, 2025. "Optimal taxation, minimum wage constraint in a model of capital-skill complementarity," The Quarterly Review of Economics and Finance, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:quaeco:v:103:y:2025:i:c:s1062976925000778
    DOI: 10.1016/j.qref.2025.102036
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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