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Voting on the tax rate when attitude to risk depends on skill heterogeneity

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  • Francesco Farina
  • Fulvio Fontini

Abstract

We set a model in which a population of individuals is segmented in the labour market into two groups: high-skill workers and low-skill ones. Risk exposure consists of a macroeconomic employment risk for which the two groups have diverging probabilities. We investigate how risk affects preferences on the optimal level of the tax rate and show that a crucial role is played by workers’ risk-attitude in advanced and backward economies. In the former, overall production increases as low-skills’ working perspectives worsen, while the opposite is true for the latter. In the first case, a crucial role is played by low-skill workers, whose behaviour depends on their degree of risk aversion: low-skill high-risk averse individuals will chose a lower tax rate as their risk rises, while the opposite is true for both the low-skill low-risk-averse workers and the high-skill ones. In the case of backward economies, both the high-skills high-risk-averse and the low-skill individuals choose a lower tax rate as their risk increases, while the opposite is true for high-skills low risk-averse workers.

Suggested Citation

  • Francesco Farina & Fulvio Fontini, 2009. "Voting on the tax rate when attitude to risk depends on skill heterogeneity," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0109, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  • Handle: RePEc:usi:depfid:0109
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    References listed on IDEAS

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    More about this item

    Keywords

    Constant Relative Risk aversion; Optimal Tax Rate; Workers’ Heterogeneity.;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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