When to Tax Labour?

Renström, Thomas I and Parantap Basu

No 3456, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze optimal dynamic taxation when labor supply is indivisible, as in Hansen (1985) and Rogerson (1988). Markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this extrinsic income uncertainty. The optimal wage tax is zero in both the short and long run only when leisure is neutral. If leisure is normal (inferior), labor should be taxed (subsidized). We further derive a wide range of preferences, including HARA, which encompasses normal and non-normal leisure. For those preferences we characterize the dynamic paths of the wage tax.

Keywords: Optimal taxation; Dynamic taxation; Indivisible labour (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Date: 2002-07
New Economics Papers: this item is included in nep-lab
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