A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment

27 Pages Posted: 22 Mar 2010

See all articles by Mathias Hungerbühler

Mathias Hungerbühler

Catholic University of Louvain; Université Paris II - Panthéon-Assas - ERMES

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

Alexis Parmentier

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; IZA Institute of Labor Economics

Abstract

We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to their efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.

Keywords: optimal income taxation, unemployment, matching

JEL Classification: H21, H23, J64

Suggested Citation

Hungerbühler, Mathias and Lehmann, Etienne and Parmentier, Alexis and Van der Linden, Bruno, A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment. IZA Discussion Paper No. 4832. Available at SSRN: https://ssrn.com/abstract=1575885

Mathias Hungerbühler (Contact Author)

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Université Paris II - Panthéon-Assas - ERMES

12 Place du Panthéon
Paris, Cedex 5, 75005
France

Etienne Lehmann

CREST ( email )

France

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Alexis Parmentier

University of Paris 2 Pantheon-Assas - ERMES ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

University of Paris 1 Pantheon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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