Optimal income taxation with endogenous participation and search unemployment

Lehmann, Etienne;Parmentier, Alexis;Van der Linden, Bruno
(2008) , 39 pages

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Authors
  • Lehmann, EtienneCREST-INSEE (Paris)
    Author
  • Parmentier, AlexisEPEE - Université d'Evry Val d'Essonne
    Author
  • Van der Linden, BrunoUCLouvain
    Author
Abstract
This paper characterizes the optimal redistributive taxation when individuals are heterogeneous in two exogenous dimensions: 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. The government only observes wage levels. Under a Maximin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-faire values. A simulation exercise con rms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.
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Lehmann, E., Parmentier, A., & Van der Linden, B. (2008). Optimal income taxation with endogenous participation and search unemployment (ECON Discussion Papers 2008-36). https://hdl.handle.net/2078.5/249575