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Optimal factor taxation under wage bargaining: a dynamic perspective

  • Koskela, Erkki
  • von Thadden, Leopold
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    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arrive at the conclusion that both instruments should be used, implying that the zero-capital tax result in general is no longer valid under imperfectly competitive labour markets.

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    File URL: http://econstor.eu/bitstream/10419/19586/1/200231dkp.pdf
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    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2002,31.

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    Date of creation: 2002
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    Handle: RePEc:zbw:bubdp1:4195
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