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Monopsony Power, Income Taxation and Welfare

Albert Jan Hummel

No 9128, CESifo Working Paper Series from CESifo

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.

Keywords: monopsony; optimal taxation; tax incidence (search for similar items in EconPapers)
JEL-codes: H21 H22 J42 J48 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-lma, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9128

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