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A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

Author

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  • 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)

Abstract

We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to their efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.

Suggested Citation

  • Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2010. "A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment," IZA Discussion Papers 4832, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4832
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    More about this item

    Keywords

    unemployment; optimal income taxation; matching;

    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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