Optimal Income Taxation with Endogenous Participation and Search Unemployment

Etienne Lehmann (), Alexis Parmentier () and Bruno Van der Linden

No 08-16, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper characterizes the optimal redistributive taxation when individuals are hetero- geneous in two exogenous dimensions: their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. The government only observes wage levels. Under a Max- imin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-faire values. A simulation exercise confirms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.

Keywords: Non-linear taxation; redistribution; adverse selection; random participation; unemployment; labor market frictions (search for similar items in EconPapers)
JEL-codes: D82 H21 J64 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008
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Related works:
Journal Article: Optimal income taxation with endogenous participation and search unemployment (2011)
Working Paper: Optimal Income Taxation with Endogenous Participation and Search Unemployment (2011)
Working Paper: Optimal income taxation with endogenous participation and search unemployment (2011)
Working Paper: Optimal income taxation with endogenous participation and search unemployment (2011)
Working Paper: Optimal Income Taxation with Endogenous Participation and Search Unemployment (2009)
Working Paper: Optimal income taxation with endogenous participation and search unemployment (2008)
Working Paper: Optimal Income Taxation with Endogenous Participation and Search Unemployment (2008)
Working Paper: Optimal Income Taxation with Endogenous Participation and Search Unemployment (2008)
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