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When to Tax Labor?

Author

Listed:
  • Parantap Basu
  • Thomas Renstrom

    (Wallis Institute of Political Economy, University of Rochester and CEPR)

Abstract

We analyze optimal dynamic taxation when labor supply is indivisible, as in Hansen (1985) and Rogerson (1988). Markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this extrinsic income uncertainty. The optimal wage tax is zero in both the short and long run only when leisure is neutral. If leisure is normal (inferior), labor should be taxed (subsidized). We further derive a wide range of preferences, including HARA, which encompasses normal and non-normal leisure. For those preferences we characterize the dynamic paths of the wage tax.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Parantap Basu & Thomas Renstrom, "undated". "When to Tax Labor?," Wallis Working Papers WP28, University of Rochester - Wallis Institute of Political Economy.
    • Handle: RePEc:roc:wallis:wp28
    as

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    References listed on IDEAS

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    Cited by:

    1. Renström, Thomas I & Marsiliani, Laura & Basu, Parantap, 2004. "Optimal Dynamic Taxation with Indivisible Labour," CEPR Discussion Papers 4190, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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