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Optimal Capital Taxation and Labor Market Search

  • David Domeij

    (Stockholm School of Economics)

In this paper I study the nature of optimal factor income taxation in a neoclassical growth model where search frictions on the labor marker generate unemployment. I show that the introduction of search frictions changes the Chamley-Judd result of zero capital taxation as follows: if the government is constrained to capital and labor taxation, the optimal capital tax is in general non-zero, but if the government has access to other tax instruments the Chamley.Judd result survives. Quantitatively, the optimal capital tax is small, in the range of -8 to 8 percent. The welfare costs of being constrained can, however, be quite large. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.01.011
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 3 (July)
Pages: 623-650

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Handle: RePEc:red:issued:v:8:y:2005:i:3:p:623-650
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