IDEAS home Printed from https://ideas.repec.org/p/crs/wpaper/2010-13.html
   My bibliography  Save this paper

A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

Author

Listed:
  • Mathias Hungerbuhler

    (Crest)

  • Etienne Lehmann

    (Crest)

  • Alexis Parmentier

    (Crest)

  • Bruno Van Der Linden

    (Crest)

Abstract

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.

Suggested Citation

  • Mathias Hungerbuhler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," Working Papers 2010-13, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2010-13
    as

    Download full text from publisher

    File URL: http://crest.science/RePEc/wpstorage/2010-13.pdf
    File Function: Crest working paper version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    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. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
    3. Boone, Jan & Bovenberg, Lans, 2004. "The optimal taxation of unskilled labor with job search and social assistance," Journal of Public Economics, Elsevier, vol. 88(11), pages 2227-2258, September.
    4. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, vol. 95(11), pages 1523-1537.
    5. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    6. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
    7. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
    8. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.),Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627, Elsevier.
    9. 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.
    10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    11. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560, December.
    12. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 28(Jul), pages 2-13.
    13. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
    14. Stephen Nickell & Luca Nunziata & Wolfgang Ochel, 2005. "Unemployment in the OECD Since the 1960s. What Do We Know?," Economic Journal, Royal Economic Society, vol. 115(500), pages 1-27, January.
    15. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February.
    16. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
    17. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2007. "Welfare reform in European countries: a microsimulation analysis," Economic Journal, Royal Economic Society, vol. 117(516), pages 1-44, January.
    18. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
    19. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
    20. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    21. Costas Meghir & David Phillips, 2008. "Labour supply and taxes," IFS Working Papers W08/04, Institute for Fiscal Studies.
    22. 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.
    23. 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.
    24. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
    25. repec:oup:ecpoli:v:15:y:2000:i:30:p:47-104 is not listed on IDEAS
    26. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
    27. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
    28. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, vol. 95(11), pages 1523-1537.
    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. 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.
    4. 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.
    5. Bruno Jacquet & Etienne Lehmann & Bruno Van der Linden, 2011. "Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses," Working Papers 2011-15, Center for Research in Economics and Statistics.
    6. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
    7. 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.
    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. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2011. "Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses," IZA Discussion Papers 5642, Institute of Labor Economics (IZA).
    10. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    11. Laurence Jacquet & Etienne lehmann & Bruno Van Der Linden, 2012. "Signing distortions in optimal tax or other adverse selection models with random participation," THEMA Working Papers 2012-27, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    12. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    13. Guillaume Willeme, . "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    14. Pekka Sinko, 2007. "Labour taxation, job creation and job destruction—Focusing on the role of wage setting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(5), pages 583-604, October.
    15. Boone, Jan & Bovenberg, Lans, 2002. "Optimal labour taxation and search," Journal of Public Economics, Elsevier, vol. 85(1), pages 53-97, July.
    16. Laurence JACQUET & Etienne LEHMANN & Bruno VAN DER LINDEN, 2012. "Signing distortions in optimal tax and other adverse selection problems with random participation," LIDAM Discussion Papers IRES 2012003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    17. Laurence JACQUET & Etienne LEHMANN & Bruno VAN DER LINDEN, 2012. "Signing distortions in optimal tax and other adverse selection problems with random participation," LIDAM Discussion Papers IRES 2012003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    18. Boone, Jan & Bovenberg, Lans, 2004. "The optimal taxation of unskilled labor with job search and social assistance," Journal of Public Economics, Elsevier, vol. 88(11), pages 2227-2258, September.
    19. Normann Lorenz & Dominik Sachs, 2011. "Optimal Nonlinear Taxation, Minimum Hours, and the Earned Income Tax Credit," Research Papers in Economics 2011-11, University of Trier, Department of Economics.
    20. Choné, Philippe & Laroque, Guy, 2011. "Optimal taxation in the extensive model," Journal of Economic Theory, Elsevier, vol. 146(2), pages 425-453, March.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crs:wpaper:2010-13. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Secretariat General). General contact details of provider: http://edirc.repec.org/data/crestfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.