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Is the Optimal Labor Income Tax Progressive in a Unionized Economy?

  • Aronsson, Thomas


    (Department of Economics, Umeå University)

  • Sjögren, Tomas


    (Department of Economics, Umeå University)

This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The government is assumed to act in accordance with a utilitarian objective function. The main purpose of the paper is to study the determinants of tax progression and, in particular, to relate tax progression to the choice of work hours. We show how the optimal degree of tax progression depends on the incentives underlying the choice of work hours, as well as on whether or not the government can monitor the wage rate via tax policy. If the wage rate is chosen by the union member with median seniority, in which case the wage rate will be fixed under certain conditions, the marginal tax rate is unambiguously positive and the tax structure unambiguously progressive. If, on the other hand, the union acts according to the utilitarian framework, we can no longer in general rule out regressive tax systems. We also show that the tax system is more likely to be progressive if the individual union members freely choose their hours of work conditional on the wage rate, than if the union is able to directly affect the hours of work per employee.

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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 587.

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Length: 18 pages
Date of creation: 24 Apr 2002
Date of revision:
Handle: RePEc:hhs:umnees:0587
Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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  1. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
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