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Title:Optimal income taxation with endogenous participation and search unemployment PDF Logo
Authors:Lehmann, Etienne
Parmentier, Alexis
van der Linden, Bruno
Issue Date:2008
Series/Report no.:IZA discussion papers 3804
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 confirms 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.
Subjects:Non-linear taxation
redistribution
adverse selection
random participation
unemployment
labor market frictions
JEL:D82
Persistent Identifier of the first edition:urn:nbn:de:101:1-20081126795
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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