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Optimal factor taxation under wage bargaining: a dynamic perspective

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  • Koskela, Erkki
  • von Thadden, Leopold

Abstract

We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: i) taxes on capital and labour are the only available tax instruments for raising revenues, and ii) labour markets are subject to a static inefficiency resulting from wage bargaining. If considered in isolation, under broad assumptions the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero-capital tax result in general is no longer valid under imperfectly competitive labour markets.

Suggested Citation

  • Koskela, Erkki & von Thadden, Leopold, 2002. "Optimal factor taxation under wage bargaining: a dynamic perspective," Discussion Paper Series 1: Economic Studies 2002,31, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4195
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    More about this item

    Keywords

    Optimal taxation; Imperfectrly competitive labour markets; Capital accumulation;
    All these keywords.

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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