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Optimal dynamic labour taxation.

Basu, P. and Renström, T. I. (2007) 'Optimal dynamic labour taxation.', Macroeconomic dynamics., 11 (5). pp. 567-588.


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.

Item Type:Article
Keywords:Optimal taxation, Dynamic taxation; Indivisible labor.
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Date accepted:No date available
Date deposited:13 May 2009
Date of first online publication:November 2007
Date first made open access:No date available

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