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Optimal Income Taxation with Endogenous Participation and Search Unemployment

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  • 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)

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eve:wpaper:08-16
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    Cited by:

    1. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," IZA Discussion Papers 4832, Institute of Labor Economics (IZA).
    2. Aronsson, Thomas & Micheletto, Luca, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Umeå Economic Studies 953, Umeå University, Department of Economics.
    3. Frédéric Gavrel, 2015. "Participation, Recruitment Selection, and the Minimum Wage," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(4), pages 1281-1305, October.
    4. 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.
    5. Alessandro Petretto, 2014. "On the Theoretical Background of Cosciani’s Tax Reform," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2014(3), pages 59-79.
    6. 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).
    7. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    8. Thomas Aronsson & Luca Micheletto, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Working Papers 107, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
    9. 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.
    10. Lawson, Nicholas, 2019. "Taxing the job creators: Efficient taxation with bargaining in hierarchical firms," Labour Economics, Elsevier, vol. 56(C), pages 1-25.
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    12. Nicholas Lawson, 2014. "Taxing the Job Creators: Effcient Progressive Taxation with Wage Bargaining," Working Papers halshs-01059604, HAL.
    13. 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.
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    16. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 200(1), pages 15-39, March.
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    18. Adegbite, Tajudeen Adejare, 2017. "Personal Income Tax and Government Revenue: Evidence from Oyo State," International Journal of Social and Administrative Sciences, Asian Economic and Social Society, vol. 2(2), pages 45-51, December.
    19. Regev Eitan & Strawczynski Michel, 2020. "The Optimal Earned Income Tax Credit (EITC) Schedule: A Trapezoid or a Triangle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(3), pages 1-16, July.
    20. Makoto Masui, 2020. "Efficiency in a search and matching model with endogenous labor participation and different skill groups," Economics Bulletin, AccessEcon, vol. 40(4), pages 2648-2653.
    21. Brendan Epstein & Ryan Nunn & Musa Orak & Elena Patel, 2020. "Taxation, Social Welfare, and Labor Market Frictions," International Finance Discussion Papers 1284, Board of Governors of the Federal Reserve System (U.S.).
    22. Guillaume Willeme, . "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

    More about this item

    Keywords

    Non-linear taxation; redistribution; adverse selection; random participation; unemployment; labor market frictions;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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