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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
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    References listed on IDEAS

    as
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    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

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