Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

Erkki Koskela and Leopold Von Thadden

German Economic Review, 2008, vol. 9, issue 2, 135-159

Abstract: Abstract. We consider the issue of steady‐state optimal factor taxation in a Ramsey‐type dynamic general equilibrium setting with two distinct distortions: (i) taxes on capital and labour are the only available tax instruments for raising revenues and (ii) labour markets are subject to an inefficiency resulting from wage bargaining. If considered in isolation, the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets.

Date: 2008
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https://doi.org/10.1111/j.1468-0475.2008.00428.x

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Journal Article: Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective (2008)
Working Paper: Optimal Factor Taxation under Wage Bargaining - A Dynamic Perspective (2003)
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