Optimal dynamic labor taxation

Basu, P.; Renström, TI.

Abstract

We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.

Citation

Basu, P., & Renström, T. (2007). Optimal dynamic labor taxation. Macroeconomic Dynamics, 11(5), 567-588. https://doi.org/10.1017/s1365100507060221

• Journal Article Type: Article
• Publication Date: 2007-11
• Deposit Date: Aug 19, 2008
• Publicly Available Date: May 13, 2009
• Journal: Macroeconomic Dynamics
• Print ISSN: 1365-1005
• Electronic ISSN: 1469-8056
• Publisher: Cambridge University Press
• Peer Reviewed: Peer Reviewed
• Volume: 11
• Issue: 5
• Pages: 567-588
• DOI: https://doi.org/10.1017/s1365100507060221
• Keywords: Optimal taxation, Dynamic taxation; Indivisible labor.
• Public URL: https://durham-repository.worktribe.com/output/1554406