Optimal Taxation in a Unionised Economy

28 Pages Posted: 24 May 2018

See all articles by Vidar Christiansen

Vidar Christiansen

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ray Rees

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); University of Sydney Law School

Date Written: March 21, 2018

Abstract

Unions appear to have an aversion to wage disparities among their members, leading to wage compression. This paper analyses the consequences of this for income tax policy. In a two-sector general equilibrium model we highlight the tradeoff between correcting the resource misallocation created by wage compression and the government’s distributional objectives. Where the union’s aversion to wage dispersion is strong, tax policy can do little to correct the distortion in the supply of trained labour, though it can come closer to achieving distributional aims. Where wage compression is less pronounced, tax policy can have significant effects on resource misallocation, at the expense of its distributional goals.

Keywords: income taxation, optimal taxation, unionized economy, wage compression

JEL Classification: H210, H240

Suggested Citation

Christiansen, Vidar and Rees, Ray, Optimal Taxation in a Unionised Economy (March 21, 2018). CESifo Working Paper Series No. 6954, Available at SSRN: https://ssrn.com/abstract=3180501 or http://dx.doi.org/10.2139/ssrn.3180501

Vidar Christiansen (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
011-47-22-855121 (Phone)
011-47-22-855035 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Ray Rees

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

University of Sydney Law School ( email )

Sydney
Australia

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