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Optimal Income Taxation with Endogenous Participation and Search Unemployment

  • Etienne Lehmann

    ()

    (CREST, IZA, IDEP and Université Catholique de Louvain)

  • Alexis Parmentier

    ()

    (EPEE-TEPP - Université d’Evry and Université Catholique de Louvain)

  • Bruno Van Der Linden

    ()

    (IRES - Université Catholique de Louvain, FNRS, ERMES - Université Paris 2 and IZA)

This paper characterizes the optimal redistributive taxation when individuals are hetero- geneous in two exogenous dimensions: 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. The government only observes wage levels. Under a Max- imin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-faire values. A simulation exercise confirms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.

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File URL: http://epee.univ-evry.fr/RePEc/2008/08-16.pdf
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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-16.

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Length: 40 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-16
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