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Optimal Capital Taxation and Labor Market Search

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  • David Domeij

    (Stockholm School of Economics)

Abstract

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)

Suggested Citation

  • David Domeij, 2005. "Optimal Capital Taxation and Labor Market Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 623-650, July.
  • Handle: RePEc:red:issued:v:8:y:2005:i:3:p:623-650
    DOI: 10.1016/j.red.2005.01.011
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    2. Chen, Been-Lon & Chen, Hung-Ju & Wang, Ping, 2021. "Long-Run Tax Incidence In A Human-Capital-Based Endogenous Growth Model With Labor-Market Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 25(2), pages 337-378, March.
    3. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2011. "The distributional consequences of tax reforms under market distortions," SIRE Discussion Papers 2011-73, Scottish Institute for Research in Economics (SIRE).
    4. HIRAGUCHI Ryoji, 2021. "Optimal Wealth Taxation in the Schumpeterian Growth Model with Unemployment," Discussion papers 21056, Research Institute of Economy, Trade and Industry (RIETI).
    5. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency," Computing in Economics and Finance 2006 222, Society for Computational Economics.
    6. Volker Grossmann & Panu Poutvaara, 2009. "Pareto-improving bequest taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(5), pages 647-669, October.
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    9. Sanjay K. Chugh, 2006. "Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 683-714, October.
    10. Linnemann, Ludger & Schabert, Andreas, 2012. "Optimal government spending with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 795-811.
    11. Lu, Chia-Hui, 2015. "Fiscal policies, frictional labor market, and endogenous growth," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 315-327.
    12. Philip Jung & Keith Kuester, 2015. "Optimal Labor-Market Policy in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 124-156, April.
    13. Ping-ho Chen & Angus C. Chu & Hsun Chu & Ching-chong Lai, 2019. "Optimal Capital Taxation in an Economy with Innovation-Driven Growth," Working Papers 201913, University of Liverpool, Department of Economics.
    14. Erkki Koskela & Leopold Von Thadden, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, Verein für Socialpolitik, vol. 9(2), pages 135-159, May.
    15. Chia-Hui Lu & Been-Lon Chen, 2015. "Optimal Capital Taxation in a Neoclassical Growth Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(2), pages 257-269, April.
    16. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
    17. Wei Jiang, 2014. "Optimal taxation and labour wedge in models with equilibrium unemployment," Studies in Economics 1407, School of Economics, University of Kent.
    18. George Economides & Anastasios Rizos, 2021. "Optimal taxation: full-commitment versus time-consistent equilibrium," Economic Change and Restructuring, Springer, vol. 54(3), pages 717-753, August.
    19. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
    20. Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1392-1402, August.
    21. Shu‐Hua Chen, 2018. "The Credit‐Channel Transmission Mechanism And The Nonlinear Growth And Welfare Effects Of Inflation And Taxes," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 724-744, April.
    22. Ludger Linnemann & Andreas Schabert, 2008. "Optimal Government Spending and Unemployment," Tinbergen Institute Discussion Papers 08-024/2, Tinbergen Institute.
    23. David M. Arseneau & Sanjay K. Chugh & André Kurmann, 2009. "Asset Value Constraints in Models of Incomplete Factor Taxation," Cahiers de recherche 0949, CIRPEE.
    24. Tapio Palokangas, 2014. "Optimal Capital Taxation, Labour Unions, and the Hold-Up Problem," LABOUR, CEIS, vol. 28(4), pages 359-375, December.
    25. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.

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    More about this item

    Keywords

    Optimal taxation; Search externalities;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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