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Optimal taxation and redistribution in an OLG model with unemployment

  • Thomas Aronsson
  • Tomas Sjögren

    ()

  • Torbjörn Dalin

This paper concerns redistribution and optimal taxation in an OLG model with two employed ability-types. We assume that the wage rates are determined by bargaining between unions and firms, implying that the equilibrium is characterized by unemployment. The tax instruments are nonlinear taxes on labor income and capital income. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. As such, dynamic models may provide insights with respect to labor income taxation, which are not easily gained in static models. In addition, since the relationship between the employment and the capital stock implies production inefficiency at the second best optimum, imperfect competition in the labor market may, itself, justify capital income taxation.

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File URL: http://hdl.handle.net/10.1007/s10797-007-9059-3
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 16 (2009)
Issue (Month): 2 (April)
Pages: 198-218

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Handle: RePEc:kap:itaxpf:v:16:y:2009:i:2:p:198-218
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  1. Bovenberg, A.L. & van der Ploeg, F., 1996. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Other publications TiSEM 2a1a87d9-2ed9-41a7-b3aa-b, Tilburg University, School of Economics and Management.
  2. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  4. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, 1997. "Redistribution with unobservable bequests: a case for taxing capital income," CORE Discussion Papers 1997070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Oswald, Andrew J., 1993. "Efficient contracts are on the labour demand curve : Theory and facts," Labour Economics, Elsevier, vol. 1(1), pages 85-113, June.
  6. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  7. Thomas Aronsson & Tomas Sjögren, 2004. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 661-675, December.
  8. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
  9. Chamley, Christophe, 1985. "Efficient Taxation in a Stylized Model of Intertemporal General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 451-68, June.
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