Optimal taxation, minimum wage constraint in a model of capital-skill complementarity

Yunmin Chen and Dongmeng Ren

The Quarterly Review of Economics and Finance, 2025, vol. 103, issue C

Abstract: We propose a competitive equilibrium model incorporating taxation and minimum wage constraints in the presence of capital-skill complementarity. The paper mainly addresses how exogenous minimum wage constraints (MWC) impact the optimal progressivity of labor income tax and optimal capital income tax rate. We find the following two results for a steady-state optimal taxes with a binding MWC in an economy with risk averse agents: (i) The capital tax rate is positive, (ii) The labor tax schedule is less progressive in the presence of the MWC than in its absence.

Keywords: Capital taxation; Ramsey problem; Minimum wage; Progressivity (search for similar items in EconPapers)
JEL-codes: E62 H21 J38 O38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:103:y:2025:i:c:s1062976925000778

DOI: 10.1016/j.qref.2025.102036

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