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A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

  • Mathias Hungerbuhler


  • Etienne Lehmann


  • Alexis Parmentier


  • Bruno Van Der Linden


We consider an optimal nonlinear income tax problem in a model with search-matching unemployment and where the negotiated pre-tax wage decreases with mar-ginal tax rate but increases with the level of tax. By omitting labor supply responsesand assuming bene?t for the unemployed and an e¢ cient allocation in the absenceof tax, we characterize the optimal equity-e¢ ciency trade o¤. We show that in labormarket speci?c to each interior level of skill, optimal wages and unemployment ratesare distorted downwards. Moreover, average tax rate are increasing along the in-come distribution and marginal tax rate are positive at the top, even when the skilldistribution is bonded.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-13.

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Length: 15
Date of creation: 2010
Date of revision:
Handle: RePEc:crs:wpaper:2010-13
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  4. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
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  7. Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," Documents de recherche 08-16, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  8. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
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  12. Rochet, J. C., 1985. "The taxation principle and multi-time Hamilton-Jacobi equations," Journal of Mathematical Economics, Elsevier, vol. 14(2), pages 113-128, April.
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  17. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
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  24. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2005. "Optimal Redistributive Taxation in a Search Equilibrium Model," IZA Discussion Papers 1460, Institute for the Study of Labor (IZA).
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