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Optimal income taxation with endogenous participation and search unemployment

Author

Listed:
  • Etienne Lehmann
  • Alexis Parmentier

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

  • Bruno van Der Linden

Abstract

We characterize optimal redistributive taxation when individuals are heterogeneous in 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. Average tax rates are increasing at the optimum. This shifts wages below their laissez faire value and distorts labor demand upwards. The marginal tax rate is positive at the top of the skill distribution even when the latter is bounded. These results are analytically shown under a Maximin objective when the elasticity of participation is decreasing in the skill level and are numerically confirmed under a more general objective. Under the Maximin, above approximately 20,000 per year, our model recommends higher marginal tax rates than a comparable competitive setting. © 2011 Elsevier B.V.

Suggested Citation

  • Etienne Lehmann & Alexis Parmentier & Bruno van Der Linden, 2011. "Optimal income taxation with endogenous participation and search unemployment," Post-Print hal-02877975, HAL.
    • Handle: RePEc:hal:journl:hal-02877975
    DOI: 10.1016/j.jpubeco.2011.05.012
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    More about this item

    Keywords

    Adverse selection; Labor market frictions.; Non-linear taxation; Random participation; Redistribution; Unemployment;
    All these keywords.

    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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