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Optimal Income Taxation and the Labour Market: An Overview

  • Robin Boadway
  • Jean-François Tremblay

This article presents a survey of how optimal income taxation is influenced by labour market considerations. We begin with the standard supply-side optimal income tax model of Mirrlees, and outline the various extensions to that model. We then consider how optimal taxation is affected by various demand-side considerations in a full-employment setting, including endogenous wage rates, human capital investment, extensive-margin labour variation and its applications, minimum wages, and occupational choice. Various sources of involuntary unemployment are next considered, such as inability to work, long-term search unemployment, and temporary search unemployment. The latter raises the need for unemployment insurance as well as redistributive taxation. We conclude with a catalogue of unresolved issues. (JEL codes: H21, H23, J2) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

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Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 59 (2013)
Issue (Month): 1 (March)
Pages: 93-148

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Handle: RePEc:oup:cesifo:v:59:y:2013:i:1:p:93-148
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