Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/63071 
Year of Publication: 
1999
Series/Report no.: 
Memorandum No. 1999,19
Publisher: 
University of Oslo, Department of Economics, Oslo
Abstract: 
Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite ‘yes’. But at least three forces may pull in the other direction. First, low-wage workers may on average have more elastic labour supply schedules than high-wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in noncompetitive labour markets, progressive taxes typically encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre-tax wages, and hence increase the demand for low-skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade-off between equality and efficiency is not always inevitable.
Subjects: 
Tax progressivity
dead-weight loss
redistribution
JEL: 
H24
J30
J58
Document Type: 
Working Paper

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