Optimal Taxation and Redistribution in an OLG Model with Unemployment

Thomas Aronsson (), Torbjörn Dalin () and Tomas Sjögren ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Torbjörn Dalin: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 635, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper concerns redistribution and optimal taxation in an OLG model with two employed ability-types. We assume that the wage rates are determined by bargaining between unions and firms, implying that the equilibrium is characterized by unemployment. The tax instruments are nonlinear taxes on labor income and capital income. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. As such, dynamic models may provide insights with respect to labor income taxation, which are not easily gained in static models. In addition, since the relationship between the employment and the capital stock implies production inefficiency at the second best optimum, imperfect competition in the labor market may, itself, justify capital income taxation.

Keywords: Optimal taxation; OLG model; union wage setting (search for similar items in EconPapers)
JEL-codes: H21 H23 J51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2004-04-19

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