Optimal Tax Policy and Wage Subsidy in an Imperfectly Competitive Economy

Sheikh Selim ()

No E2010/15, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: In an imperfectly competitive economy with direct and indirect taxes, the first best wage subsidy overcompensates workers and provides the incentive to misreport working hours. We show that in the second best optimum where the government cannot use a wage subsidy, the optimal policy is to tax labour income at a zero rate. This policy is optimal because it minimizes the incentive to misreport working hours.

Keywords: Optimal Taxation; Ramsey Problem; Wage Subsidy (search for similar items in EconPapers)
JEL-codes: D42 E62 H21 H30 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2010-11
New Economics Papers: this item is included in nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2010/15

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