Optimal Labor Taxation and Search
50 Pages Posted: 5 Nov 2001
Date Written: October 2001
Abstract
This Paper explores the optimal role of the tax system in alleviating labor-market imperfections and raising revenue. For this purpose, the standard search model of the labor market is extended by introducing scarce entrepreneurial talent and arbitrage between the supply and demand. We study how these extensions affect the following two major implications of the standard model: (1) only the ad valorem component of the wage tax should be employed to raise revenue; (2) the optimal tax system should not distort labor-market tightness.
Keywords: Labor market, optimal tax system, search model
JEL Classification: H21, H22, H23, J64
Suggested Citation: Suggested Citation
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