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Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides

  • Mathias, HUNGERBUELHER

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Etienne, LEHMANN

    (Université Paris 1)

  • Alexis PARMENTIER

    (Université Paris 2)

  • Bruno VAN DER LINDEN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to the laissez-faire, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2003024.

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Length: 28
Date of creation: 01 Dec 2003
Date of revision:
Handle: RePEc:ctl:louvir:2003024
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