Optimal Redistributive Taxation in a Search Equilibrium Model
Catholic University of Louvain; Université Paris II - Panthéon-Assas - ERMES
CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); Institute for the Study of Labor (IZA)
University of Paris 2 Pantheon-Assas - ERMES; University of Paris 1 Pantheon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)
Bruno Van der Linden
Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; Institute for the Study of Labor (IZA); Université Paris II - Panthéon-Assas - ERMES
IZA Discussion Paper No. 1460
This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to their efficient values, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.
Number of Pages in PDF File: 35
Keywords: optimal income taxation, unemployment, wage bargaining, matching
JEL Classification: D82, H21, H24, J64working papers series
Date posted: January 19, 2005
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