Optimal Income Taxation with Endogenous Participation and Search Unemployment

42 Pages Posted: 8 Feb 2011

See all articles by Etienne Lehmann

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2011

Abstract

We characterize optimal redistributive taxation when individuals are heterogeneous in their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. Average tax rates are increasing at the optimum. This shifts wages below their laissez faire value and distorts labor demand upwards. The marginal tax rate is positive at the top of the skill distribution even when the latter is bounded. These results are analytically shown under a Maximin objective when the elasticity of participation is decreasing in the skill level and are numerically confirmed under a more general objective.

Keywords: non-linear taxation, redistribution, adverse selection, random participation, unemployment, labor market frictions

JEL Classification: H210, H230, J640

Suggested Citation

Lehmann, Etienne and Parmentier, Alexis and Van der Linden, Bruno, Optimal Income Taxation with Endogenous Participation and Search Unemployment (January 31, 2011). CESifo Working Paper Series No. 3324. Available at SSRN: https://ssrn.com/abstract=1756580

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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