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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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  • Etienne Lehmann
  • Alexis Parmentier
  • Bruno Van der Linden

Abstract

We characterize optimal redistributive taxation when individuals are heterogeneous in their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. Average tax rates are increasing at the optimum. This shifts wages below their laissez faire value and distorts labor demand upwards. The marginal tax rate is positive at the top of the skill distribution even when the latter is bounded. These results are analytically shown under a Maximin objective when the elasticity of participation is decreasing in the skill level and are numerically confirmed under a more general objective.

Suggested Citation

  • Etienne Lehmann & Alexis Parmentier & Bruno Van der Linden, 2011. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," CESifo Working Paper Series 3324, CESifo.
  • Handle: RePEc:ces:ceswps:_3324
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    References listed on IDEAS

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    1. Hungerbühler, Mathias & Lehmann, Etienne, 2009. "On the optimality of a minimum wage: New insights from optimal tax theory," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 464-481, April.
    2. Mathias Hungerbühler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2006. "Optimal Redistributive Taxation in a Search Equilibrium Model," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 743-767.
    3. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
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    Citations

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    Cited by:

    1. Nicholas Lawson, 2014. "Taxing the Job Creators: Effcient Progressive Taxation with Wage Bargaining," Working Papers halshs-01059604, HAL.
    2. Aronsson, Thomas & Micheletto, Luca, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Umeå Economic Studies 953, Umeå University, Department of Economics.
    3. Laurence Jacquet & Etienne Lehmann & Bruno Linden, 2014. "Optimal income taxation with Kalai wage bargaining and endogenous participation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(2), pages 381-402, February.
    4. Frédéric Gavrel, 2015. "Participation, Recruitment Selection, and the Minimum Wage," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(4), pages 1281-1305, October.
    5. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2016. "Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 454-489, June.
    6. Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 254-292, February.
    7. Watanabe, Minoru & Miyake, Yusuke & Yasuoka, Masaya, 2018. "Unemployment, Income Growth and Social Security," MPRA Paper 86155, University Library of Munich, Germany.
    8. Brigitte Baalen & Tobias Müller, 2014. "Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(2), pages 198-227, April.
    9. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    10. Alessandro Petretto, 2014. "On the Theoretical Background of Cosciani’s Tax Reform," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2014(3), pages 59-79.
    11. Regev Eitan & Strawczynski Michel, 2020. "The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(3), pages 1-16, July.
    12. Thomas Aronsson & Luca Micheletto, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Working Papers 107, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
    13. Lawson, Nicholas, 2019. "Taxing the job creators: Efficient taxation with bargaining in hierarchical firms," Labour Economics, Elsevier, vol. 56(C), pages 1-25.
    14. Makoto Masui, 2020. "Efficiency in a search and matching model with endogenous labor participation and different skill groups," Economics Bulletin, AccessEcon, vol. 40(4), pages 2648-2653.
    15. Brendan Epstein & Ryan Nunn & Musa Orak & Elena Patel, 2020. "Taxation, Social Welfare, and Labor Market Frictions," International Finance Discussion Papers 1284, Board of Governors of the Federal Reserve System (U.S.).
    16. Guillaume Willeme, . "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

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    More about this item

    Keywords

    non-linear taxation; redistribution; adverse selection; random participation; unemployment; labor market frictions;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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