Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses

24 Pages Posted: 6 Apr 2012

See all articles by Laurence Jacquet

Laurence Jacquet

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

Etienne Lehmann

Université Paris II - Panthéon-Assas - ERMES

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: March 30, 2012

Abstract

This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework where (voluntary) nonparticipation and (involuntary) unemployment are endogenous. 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 responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only.

Keywords: optimal taxation, labor market frictions, unemployment, Kalai solution

JEL Classification: D820, H210, J640

Suggested Citation

Jacquet, Laurence and Lehmann, Etienne and Van der Linden, Bruno, Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses (March 30, 2012). CESifo Working Paper Series No. 3779. Available at SSRN: https://ssrn.com/abstract=2034835

Laurence Jacquet (Contact Author)

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

B-1348 Louvain-la-Neuve
Belgium

Etienne Lehmann

Université Paris II - Panthéon-Assas - ERMES ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
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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