Optimal Capital Taxation and Labor Market Search

David Domeij

Review of Economic Dynamics, 2005, vol. 8, issue 3, 623-650

Abstract: In this paper I study the nature of optimal factor income taxation in a neoclassical growth model where search frictions on the labor marker generate unemployment. I show that the introduction of search frictions changes the Chamley-Judd result of zero capital taxation as follows: if the government is constrained to capital and labor taxation, the optimal capital tax is in general non-zero, but if the government has access to other tax instruments the Chamley.Judd result survives. Quantitatively, the optimal capital tax is small, in the range of -8 to 8 percent. The welfare costs of being constrained can, however, be quite large. (Copyright: Elsevier)

Keywords: Optimal taxation; Search externalities (search for similar items in EconPapers)
JEL-codes: E62 H21 J40 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (30)

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DOI: 10.1016/j.red.2005.01.011

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