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Optimal dynamic labour taxation.

By P. Basu and T. I. Renström

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

Topics: Optimal taxation, Dynamic taxation; Indivisible labor. \ud
Publisher: Cambridge University Press
Year: 2007
DOI identifier: 10.1017/S1365100507060221
OAI identifier: oai:dro.dur.ac.uk.OAI2:2540
Journal:

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