Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/105703 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
School of Economics Discussion Papers No. 1407
Publisher: 
University of Kent, School of Economics, Canterbury
Abstract: 
In this paper, we develop heterogeneous agent models with equilibrium unemployment to study the optimal taxation and labour wedge. We find that the the presence of profits plays an important role in the determination of both optimal tax policy and labour wedge. Judd-Chamley optimal zero capital tax result can still hold in the model without profits. The optimal labour wedge is zero in the long run. This results in welfare gains of all agents and there is no conflict of interests between agents. But the Benthamite government chooses to subsidise the capital income in the long run in the model with profits due to the presence of productive public investment. The resulting labour wedge is non-zero which generates welfare losses of workers despite welfare gains of capitalists. The government also faces a trade-off between efficiency and equity in this model.
Subjects: 
household heterogeneity
equilibrium unemployment
optimal taxation
labour wedge
JEL: 
E13
E22
E62
Document Type: 
Working Paper

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