Voting on the tax rate when attitude to risk depends on skill heterogeneity

Francesco Farina and Fulvio Fontini

Department of Economic Policy, Finance and Development (DEPFID) University of Siena from Department of Economic Policy, Finance and Development (DEPFID), University of Siena

Abstract: We set a model in which a population of individuals is segmented in the labour market into two groups: high-skill workers and low-skill ones. Risk exposure consists of a macroeconomic employment risk for which the two groups have diverging probabilities. We investigate how risk affects preferences on the optimal level of the tax rate and show that a crucial role is played by workers’ risk-attitude in advanced and backward economies. In the former, overall production increases as low-skills’ working perspectives worsen, while the opposite is true for the latter. In the first case, a crucial role is played by low-skill workers, whose behaviour depends on their degree of risk aversion: low-skill high-risk averse individuals will chose a lower tax rate as their risk rises, while the opposite is true for both the low-skill low-risk-averse workers and the high-skill ones. In the case of backward economies, both the high-skills high-risk-averse and the low-skill individuals choose a lower tax rate as their risk increases, while the opposite is true for high-skills low risk-averse workers.

Keywords: Constant Relative Risk aversion; Optimal Tax Rate; Workers’ Heterogeneity. (search for similar items in EconPapers)
JEL-codes: H21 H30 J24 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:usi:depfid:0109

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