Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236670 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9128
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
This paper studies the implications of monopsony power for optimal income taxation and welfare. Firms observe workers’ abilities while the government does not and monopsony power determines what share of the labor market surplus is translated into profits. Monopsony power increases the tax incidence that falls on firms. This makes labor income taxes less (more) effective in redistributing labor income (profits). The optimal tax schedule is less progressive. Monopsony power alleviates the equity-efficiency trade-off that occurs because the government does not observe ability, but at the expense of exacerbating capital income inequality. I illustrate these findings for the US economy.
Subjects: 
monopsony
optimal taxation
tax incidence
JEL: 
H21
H22
J42
J48
Document Type: 
Working Paper
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