Optimal redistributive taxation in a search equilibrium model

Hungerbuhler, M;Lehmann, E;Parmentier, Alexis;Van der Linden, Bruno
(2006) The Review of Economic Studies — Vol. 73, n° 3, p. 743-767 (2006)

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Authors
  • Hungerbuhler, M
    Author
  • Lehmann, E
    Author
  • Parmentier, AlexisUCLouvain
    Author
  • Van der Linden, BrunoUCLouvain
    Author
Abstract
This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labour markets. Redistributive taxation distorts labour demand and wages. Compared to their efficient values, gross wages, unemployment, and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees-type setting.
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Hungerbuhler, M., Lehmann, E., Parmentier, A., & Van der Linden, B. (2006). Optimal redistributive taxation in a search equilibrium model. The Review of Economic Studies, 73(3), 743-767. https://doi.org/10.1111/j.1467-937X.2006.00394.x (Original work published 2006)