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Notes on Optimal Wage Taxation and Uncertainty

  • Jonathan Eaton
  • Harvey S. Rosen

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.

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File URL: http://www.nber.org/papers/w0388.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0388.

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Date of creation: Aug 1979
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Publication status: published as Eaton, Jonathan and Rosen, Harvey S. "Labor Supply, Uncertainty, and Efficient Taxation." Journal of Public Economics, Vol. 14, No. 3, (December 1980) , pp. 365-374.
Handle: RePEc:nbr:nberwo:0388
Note: PE
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  1. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
  2. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
  3. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
  4. 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 376-85, Part I, M.
  5. P. Diamond & J. Helms & J. Mirrlees, 1978. "Optimal Taxation in a Stochastic Economy: A Cobb-Douglas Example," Working papers 217, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Bradford, David F & Rosen, Harvey S, 1976. "The Optimal Taxation of Commodities and Income," American Economic Review, American Economic Association, vol. 66(2), pages 94-101, May.
  7. Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 435-45, July.
  8. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  9. Mayshar, Joram, 1977. "Should Government Subsidize Risky Private Projects?," American Economic Review, American Economic Association, vol. 67(2), pages 20-28, March.
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