Optimal Redistributive Income Taxation and Efficiency Wages

Working paper n°: 107

Unit: Welfare State and Taxation

Author(s): Thomas Aronsson, Luca Micheletto.

Year: 2017

This paper integrates efficiency wage setting in the theory of optimal redistributive income taxation. In doing so, we use a model with two skill-types, where efficiency wage setting characterizes the labor market faced by the low-skilled, whereas the high-skilled face a conventional, competitive labor market. There are two types of jobs in this economy; a low-demanding job which can be carried out by everybody, and a high-demanding job which can only be carried out by the high-skilled, meaning that a potential mimicker may either adopt a conventional income-replication strategy or a job-replication strategy. In this framework, we show that the marginal income tax implemented for the high-skilled is negative under plausible assumptions. The marginal income tax facing the low-skilled can be either positive or negative in general, even if employment-related motives for policy intervention typically contribute to an increase in this marginal tax. An increase in the unemployment benefit contributes to relax the binding self-selection constraint (irrespective of the strategy adopted by a potential mimicker), which makes this instrument particularly useful from the perspective of redistribution.

Thomas Aronsson Umeå School of Business and Economics Umeå University, Sweden

Luca Micheletto University of Milan, Italy Bocconi University CESifo Germany

Language: English

the paper may be downloaded here.

Last updated 11 October 2017 - 10:46:21