Working Paper Series, Department of Economics, Uppsala University
No 2002:18:
Optimal Non-Linear Income Taxation in Search Equilibrium
Per Engström ()
Abstract: The paper extends the basic Stiglitz (1982) model of
optimal income taxation into general search equilibrium. When we extend the
basic taxation model to include a more realistic treatment of the labor
market, a number of new interesting mechanisms arise. When wages are fixed
we find that a "work hour effect" gives the government incentives to lower
the marginal tax rate for both high and low skilled workers. The optimal
marginal tax on high skilled is thus negative, and the sign for the low
skilled marginal tax is ambiguous. With wages determined by bargaining
between firm and worker the results are changed. Both marginal tax rates
are of ambiguous sign. The tax systems' effects on the wage formation and
the unemployment rates may result in new intricate redistribution channels.
Simulations show that the marginal tax rate for high skilled is increasing
in the level of redistribution when wages are fixed, but decreasing in the
level of redistribution when wages are determined by bargaining.
Keywords: Optimal non-linear income taxation; search; unemployment; (follow links to similar papers)
JEL-Codes: H21; J22; J41; J64; (follow links to similar papers)
31 pages, November 5, 2002
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