 Taxation, social welfare, and labor market frictionsBrendan Epstein, Ryan Nunn, Musa Orak and Elena Patel European Economic Review, 2023, vol. 151, issue C Abstract: Taking taxation inefficiencies as given, a well-known public finance result is that in partial equilibrium the elasticity of taxable income (ETI) is a sufficient statistic for the deadweight loss (DWL) from labor income taxation. We revisit this result using a general equilibrium macroeconomic framework with labor search frictions. Our theory parses out the extent to which search frictions in and of themselves can distort the DWL-ETI relationship. Numerical analysis suggests that DWL is nearly 10 percent above the ETI given search frictions, only. Accounting for externalities can drive this figure up to about 20 percent, and accounting unemployment benefits can increase this number up to nearly 40 percent. Parsing out these effects both analytically and quantitatively yields novel results that contribute jointly to the public finance and macroeconomic literatures. Keywords: Elasticity of taxable income; Deadweight loss; Endogenous amenities; Labor search; Macroeconomic welfare (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:151:y:2023:i:c:s001429212200232x DOI: 10.1016/j.euroecorev.2022.104352 Access Statistics for this article European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer More articles in European Economic Review from Elsevier |
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