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Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses

  • Jacquet, Laurence

    ()

    (Norwegian School of Economics)

  • Lehmann, Etienne

    ()

    (CRED, Université Panthéon Assas Paris 2)

  • Van der Linden, Bruno

    ()

    (IRES, Université catholique de Louvain)

This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework with endogenous (voluntary) nonparticipation and (involuntary) unemployment. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two types of responses. For plausible parameters, our matching environment induces much lower employment tax rates than the usual competitive participation model.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5642.

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Length: 20 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5642
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