Optimal tax progressivity in imperfect labour markets
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Optimal tax progressivity in imperfect labour markets. / Sørensen, Peter Birch.
In: Labour Economics, Vol. 6, No. 3, 1999, p. 435-452.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Optimal tax progressivity in imperfect labour markets
AU - Sørensen, Peter Birch
N1 - JEL Classification: J30, J50, J60, H21
PY - 1999
Y1 - 1999
N2 - All modern labour market theories capable of explaining involuntary unemployment as an equilibrium phenomenon imply that increased income tax progressivity reduces unemployment, but they also imply that higher progressivity tends to reduce work effort and labour productivity. This suggests that there may be an optimal degree of tax progressivity where the marginal welfare gain from reduced involuntary unemployment is just offset by the marginal welfare loss from lower productivity. This paper sets up four different models of an imperfect labour market in order to identify the degree of tax progressivity which would maximise the welfare of the representative wage earner. Simulations with these models suggest that the optimal degree of tax progressivity could be quite large, although the results are sensitive to the generosity of unemployment benefits and to the after-tax wage elasticity of work effort
AB - All modern labour market theories capable of explaining involuntary unemployment as an equilibrium phenomenon imply that increased income tax progressivity reduces unemployment, but they also imply that higher progressivity tends to reduce work effort and labour productivity. This suggests that there may be an optimal degree of tax progressivity where the marginal welfare gain from reduced involuntary unemployment is just offset by the marginal welfare loss from lower productivity. This paper sets up four different models of an imperfect labour market in order to identify the degree of tax progressivity which would maximise the welfare of the representative wage earner. Simulations with these models suggest that the optimal degree of tax progressivity could be quite large, although the results are sensitive to the generosity of unemployment benefits and to the after-tax wage elasticity of work effort
U2 - 10.1016/S0927-5371(99)00021-4
DO - 10.1016/S0927-5371(99)00021-4
M3 - Journal article
VL - 6
SP - 435
EP - 452
JO - Labour Economics
JF - Labour Economics
SN - 0927-5371
IS - 3
ER -
ID: 151895