When Redistribution Leads to Regressive Taxation

Abstract:     
We introduce labour contracts in a framework of optimal redistribution: firms have some local market power and try to discriminate among heterogeneous workers. In this setting we show that if the firms have perfect information, i.e, they perfectly discriminate against workers and take all the surplus, the best tax function is flat. If firms have imperfect information, i.e, if they offer incentive contracts, then (under some assumptions) the best redistributive taxation is regressive.

Number of Pages in PDF File: 22

Keywords: Income Taxation, Redistribution, Labor market, Multi-principals, Adverse selection, Mechanism design

JEL Classification: D21, D82, H21, L14

working papers series