Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-28T11:36:03.506Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL DYNAMIC LABOR TAXATION

Published online by Cambridge University Press:  05 July 2007

PARANTAP BASU  and
THOMAS I. RENSTRÖM
PARANTAP BASU
Affiliation:
University of Durham
THOMAS I. RENSTRÖM
Affiliation:
University of Durham and CEPR
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Optimal TaxationDynamic TaxationIndivisible Labor
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 5 , November 2007 , pp. 567 - 588
Copyright
© 2007 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ayagiri R., A. Marcet, T.J. Sargent and J. Seppälä 2002 Optimal taxation without state contingent debt. Journal of Political Economy 110, 1220– 1254.Google Scholar
Atkeson A., V.V. Chari and P.J. Kehoe 1999 Taxing capital income: A bad idea. Quarterly Review, Federal Reserve Bank of Minneapolis 23, 3– 17.Google Scholar
Barsky R.B., N.G. Mankiw and S.P. Zeldes 1986 Ricardian consumers with Keynesian propensities. American Economic Review 76, 676– 691.Google Scholar
Basu P. 1996 Proportional income tax and the Ricardian equivalence in a nonexpected utility maximizing model. Southern Economic Journal 63, 233– 243.Google Scholar
Basu P., L. Marsiliani and T.I. Renström 2004 Optimal dynamic taxation with indivisible labour. The Manchester School 72, 34– 54.Google Scholar
Chamley C. 1985 Efficient taxation in a stylized model of intertemporal general equilibrium. International Economic Review 26, 451– 468.Google Scholar
Chamley C. 1986 Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54, 607– 622.Google Scholar
Chan L.K.C. 1983 Uncertainty and the neutrality of government financing policy. Journal of Monetary Economics 11, 351– 372.Google Scholar
Greenwood J. and G.W. Huffman 1988 On modelling the natural rate of unemployment with indivisible labour. Canadian Journal of Economics 21, 587– 609.Google Scholar
Hamilton J.H. 1987 Optimal wage and income taxation with wage uncertainty. International Economic Review 28, 373– 388.Google Scholar
Hansen G.D. 1985 Indivisible labour and the business cycle. Journal of Monetary Economics 16, 309– 327.Google Scholar
Hansen G.D. and T.J. Sargent 1988 Straight time and overtime in equilibrium. Journal of Monetary Economics 21, 281– 308.Google Scholar
Jones L., R. Manuelli and P. Rossi 1993 Optimal taxation in models of endogenous growth. Journal of Political Economy 101, 485– 517.Google Scholar
Jones L., R. Manuelli and P. Rossi 1997 On the optimal taxation of capital Income. Journal of Economic Theory 73, 93– 117.Google Scholar
Judd K.L. 1985 Redistributive taxation in a simple perfect foresight model. Journal of Public Economics 28, 59– 83.Google Scholar
Lucas R.E.J. and N.L. Stokey 1983 Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12 (1), 55– 83.Google Scholar
Mulligan C.B. 1999 Microfoundations and Macro Implications of Indivisible Labour. NBER working paper 7116.Google Scholar
Reinhorn L.J. 2003 Dynamic Optimal Taxation with Human Capital. Mimeo, University of Durham.
Renström T.I. 1999 Optimal dynamic taxation. In S.B. Dahiya (ed.), The Current State of Economic Science, Vol. 4, pp. 1717– 1734. Spellbound Publications, Rohtak, Q2 India.
Rogerson R. 1988 Indivisible labour, lotteries and equilibrium. Journal of Monetary Economics 21, 3– 16.Google Scholar
Shell K. and R. Wright 1993 Indivisibilities, lotteries, and sunspot equilibria. Economic Theory 3, 1– 17.Google Scholar