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Optimal dynamic labor taxation

Basu, P.; Renström, TI.

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Authors

P. Basu



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 Mar 29, 2024
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

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