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Optimal Redistributive Taxation in a Search Equilibrium Model

  • Hungerbühler, Mathias

    ()

    (University of Namur)

  • Lehmann, Etienne

    ()

    (CRED, Université Panthéon Assas Paris 2)

  • Parmentier, Alexis

    ()

    (University of Evry)

  • Van der Linden, Bruno

    ()

    (IRES, Université catholique de Louvain)

This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to their efficient values, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1460.

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Length: 35 pages
Date of creation: Jan 2005
Date of revision:
Publication status: published in: Review of Economic Studies, 2006, 73(3), 743-767
Handle: RePEc:iza:izadps:dp1460
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  13. Etienne Lehmann & Bruno Van Der Linden, 2007. "On the Optimality of Search Matching Equilibrium When Workers Are Risk Averse," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(5), pages 867-884, October.
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  20. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February.
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  24. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
  25. repec:oup:restud:v:38:y:1971:i:114:p:175-208 is not listed on IDEAS
  26. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  27. Mathias, HUNGERBUEHLER, 2004. "The impact of Union Power on the Optimal Income Tax Schedule," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004034, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  28. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  29. Boone, Jan & Bovenberg, Lans, 2002. "Optimal labour taxation and search," Journal of Public Economics, Elsevier, vol. 85(1), pages 53-97, July.
  30. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
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