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A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

  • 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)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4832.

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Length: 27 pages
Date of creation: Mar 2010
Date of revision:
Publication status: published in: Economie Publique/Public Economics, 2012, 22-23 (1-2), 203-218
Handle: RePEc:iza:izadps:dp4832
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  2. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
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  16. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  17. Rochet, J. C., 1985. "The taxation principle and multi-time Hamilton-Jacobi equations," Journal of Mathematical Economics, Elsevier, vol. 14(2), pages 113-128, April.
  18. Mathis Hungerbühler & Etienne Lehmann, 2007. "On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”," Working Papers 2007-17, Centre de Recherche en Economie et Statistique.
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  22. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
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