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Optimal progressive taxation in a model with endogenous skill supply

Stylianos Asimakopoulos, Jim Malley and Konstantinos Angelopoulos

No 2014/12, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: This paper examines quantitatively the extent of progressivity or regressivity of optimal labour income taxation in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation in the steady-state as well as along the transition path from the exogenous to optimal policy steady-state. In particular, in the steady state, skilled labour income is taxed about 40% more than unskilled labour income. We further find that these results are explained by a lower work time elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.

Keywords: optimal progressive taxation; skill premium; allocative efficiency (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (1)

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Working Paper: Optimal progressive taxation in a model with endogenous skill supply (2014) Downloads
Working Paper: Optimal progressive taxation in a model with endogenous skill supply (2014) Downloads
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