Optimal Income Taxation with Endogenous Participation and Search Unemployment
42 Pages Posted: 8 Feb 2011
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Optimal Income Taxation with Endogenous Participation and Search Unemployment
Date Written: January 31, 2011
Abstract
We characterize optimal redistributive taxation when individuals are heterogeneous in 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. Average tax rates are increasing at the optimum. This shifts wages below their laissez faire value and distorts labor demand upwards. The marginal tax rate is positive at the top of the skill distribution even when the latter is bounded. These results are analytically shown under a Maximin objective when the elasticity of participation is decreasing in the skill level and are numerically confirmed under a more general objective.
Keywords: non-linear taxation, redistribution, adverse selection, random participation, unemployment, labor market frictions
JEL Classification: H210, H230, J640
Suggested Citation: Suggested Citation
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