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Notes on Optimal Wage Taxation and Uncertainty

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  • Jonathan Eaton
  • Harvey S. Rosen

Abstract

Most contributions to optimal tax theory have assumed that all prices, including that of leisure, are known with certainty. The purpose of this paper is to analyze optimal taxation when workers have imperfect information about their wages at the time they choose their labor supplies. Both efficiency and redistributive aspects of the problem are considered. The paper begins with a discussion of the positive theory of wage taxation and labor supply under uncertainty. This is followed by a discussion of optimal taxation when individuals are identical, but their wages are stochastic. Finally, the case of simultaneous uncertainty and inequality is discussed. In this part of the paper it is assumed that the government's objective is to maximize a utilitarian social welfare function.

Suggested Citation

  • Jonathan Eaton & Harvey S. Rosen, 1979. "Notes on Optimal Wage Taxation and Uncertainty," NBER Working Papers 0388, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0388
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    References listed on IDEAS

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    1. Block, M K & Heineke, J M, 1973. "The Allocation of Effort under Uncertainty: The Case of Risk-averse Behavior," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 376-385, Part I, M.
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    8. Feldstein, Martin, 1973. "On the optimal progressivity of the income tax," Journal of Public Economics, Elsevier, vol. 2(4), pages 357-376.
    9. Jonathan Eaton, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(3), pages 435-445.
    10. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
    11. Diamond, P. A. & Helms, L. J. & Mirrlees, J. A., 1980. "Optimal taxation in a stochastic economy : A Cobb-Douglas example," Journal of Public Economics, Elsevier, vol. 14(1), pages 1-29, August.
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    Cited by:

    1. Yen-Ling Lin & Cheng-Yi Kang, 2023. "The Impact of Labor Market Risk on Youth Career Preparation for Sustainable Development: Evidence from Taiwan," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    2. Netzer, Nick & Scheuer, Florian, 2007. "Taxation, insurance, and precautionary labor," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1519-1531, August.

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