Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses

20 Pages Posted: 18 Apr 2011

See all articles by Laurence Jacquet

Laurence Jacquet

Catholic University of Louvain - Economic & Social Research Institute (IRES)

Etienne Lehmann

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

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

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Abstract

This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework with endogenous (voluntary) nonparticipation and (involuntary) unemployment. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two types of responses. For plausible parameters, our matching environment induces much lower employment tax rates than the usual competitive participation model.

Keywords: optimal taxation, labor market frictions, unemployment

JEL Classification: D82, H21, J64

Suggested Citation

Jacquet, Laurence and Lehmann, Etienne and Van der Linden, Bruno, Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses. IZA Discussion Paper No. 5642. Available at SSRN: https://ssrn.com/abstract=1812527

Laurence Jacquet (Contact Author)

Catholic University of Louvain - Economic & Social Research Institute (IRES) ( email )

B-1348 Louvain-la-Neuve
Belgium

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

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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