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Optimal Tax Progression: Does it Matter if Wage Bargaining is Centralized or Decentralized?

Author

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  • Aronsson, Thomas

    (Department of Economics, Umeå University)

  • Wikström, Magnus

    (Department of Economics, Umeå University)

Abstract

We study how the optimal use of labor income tax progression depends on whether the wage bargaining system is decentralized or centralized. Assuming a nonlinear labor income tax and an unrestricted profit tax, we show that a Utilitarian government is able to implement the first best resource allocation with a zero marginal labor income tax rate under decentralized wage bargaining, whereas centralized bargaining typically implies a progressive tax as well as unemployment. However, if the government and a (central) wage-setter bargain over wage formation and public policy, the resulting equilibrium is characterized by full employment and a zero marginal tax rate.

Suggested Citation

  • Aronsson, Thomas & Wikström, Magnus, 2011. "Optimal Tax Progression: Does it Matter if Wage Bargaining is Centralized or Decentralized?," Umeå Economic Studies 829, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0829
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    References listed on IDEAS

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    Cited by:

    1. Albert Jan Hummel & Bas Jacobs, 2018. "Optimal Income Taxation in Unionized Labor Markets," CESifo Working Paper Series 7188, CESifo.
    2. Hummel, Albert Jan & Jacobs, Bas, 2023. "Optimal income taxation in unionized labor markets," Journal of Public Economics, Elsevier, vol. 220(C).

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    More about this item

    Keywords

    Optimal taxation; tax progressivity; wage bargaining; corporatism;
    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
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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