Taxation and Redistribution of Residual Income Inequality
46 Pages Posted: 16 Jun 2012 Last revised: 5 Feb 2023
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Taxation and Redistribution of Residual Income Inequality
Date Written: June 2012
Abstract
This paper studies the optimal redistribution of income inequality in a model with search and matching frictions in the labor market. We study this problem in the context of a directed search model of the labor market populated by homogeneous workers and heterogeneous firms. The optimal redistribution in this model, which is associated with the constrained efficient allocation, can be attained using a positive unemployment benefit and an increasing and regressive labor income tax. The positive unemployment benefit serves the purpose of lowering the search risk faced by workers. The increasing and regressive labor tax serves the purpose of aligning the cost to the firm of attracting an additional applicant with the value of an application to society.
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