Income taxation in a frictional labor market

Joel Shapiro

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: A new model of wage dispersion is used to examine welfare aspects of income taxation. The model retains the dynamics of wage posting models while exogenizing search e¤ort, therefore allowing more insight into policy issues. The results highlight effects that standard analyses do not take into account. The optimal income tax should depend on an incidence effect between workers and firms. This incidence effect arises from firms trying to lower wages as much as possible. An employment tax proves, in certain cases, to be the best method to encourage labor force participation.

Keywords: Wage posting; optimal income taxation; search (search for similar items in EconPapers)
JEL-codes: D83 H21 H22 (search for similar items in EconPapers)
Date: 2001-06
New Economics Papers: this item is included in nep-lab
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Journal Article: Income taxation in a frictional labor market (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:559

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