Optimal dynamic taxation with indivisible labour

Basu, P.; Marsiliani, L.; Renström, TI.

Abstract

How should a government arrange taxes on labour and capital over time? To provide an answer, we develop the field of optimal dynamic taxation further by (i) incorporating indivisible labour and (ii) analysing the short-run dynamics of the capital and labour taxes under the second-best programme. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. If leisure is normal, the labour tax is gradually increased for a period and then kept constant, and, if leisure is neutral, labour is not taxed at all. Finally, we analyse the dynamics of labour supply under the optimal tax programme.

Citation

Basu, P., Marsiliani, L., & Renström, T. (2004). Optimal dynamic taxation with indivisible labour. Manchester School, 72(s1), 34-54. https://doi.org/10.1111/j.1467-9957.2004.00418.x

• Journal Article Type: Article
• Publication Date: 2004-09
• Deposit Date: Aug 19, 2008
• Journal: Manchester School
• Print ISSN: 1463-6786
• Electronic ISSN: 1467-9957
• Publisher: University of Manchester
• Peer Reviewed: Peer Reviewed
• Volume: 72
• Issue: s1
• Pages: 34-54
• DOI: https://doi.org/10.1111/j.1467-9957.2004.00418.x
• Public URL: https://durham-repository.worktribe.com/output/1555058