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Progressive taxes and the labour market : is the trade-off between equality and efficiency inevitable?

  • Roed,K.
  • Strom,S.

    (University of Oslo, Department of Economics)

Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite "yes." But at least three forces may pull in the other direction. First, low-wage workers may on average have more elastic labour supply schedules than high-wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in non-competitive labour markets, progressive taxes may encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre-tax wages, and hence increase the demand for low-skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade-off between equality and efficiency is not always inevitable. Copyright 2002 by Blackwell Publishers Ltd

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/1999/Memo-19-1999.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 19/1999.

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Date of creation: 1999
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Handle: RePEc:hhs:osloec:1999_019
Contact details of provider: Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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