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Optimal Dynamic Taxation with Indivisible Labour

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  • Parantap Basu
  • Laura Marsiliani
  • Thomas I. Renström

Abstract

How should a government arrange taxes on labour and capital over time? To provide an answer, we develop the field of optimal dynamic taxation further by (i) incorporating indivisible labour and (ii) analysing the short‐run dynamics of the capital and labour taxes under the second‐best programme. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. If leisure is normal, the labour tax is gradually increased for a period and then kept constant, and, if leisure is neutral, labour is not taxed at all. Finally, we analyse the dynamics of labour supply under the optimal tax programme.

Suggested Citation

  • Parantap Basu & Laura Marsiliani & Thomas I. Renström, 2004. "Optimal Dynamic Taxation with Indivisible Labour," Manchester School, University of Manchester, vol. 72(s1), pages 34-54, September.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:s1:p:34-54
    DOI: 10.1111/j.1467-9957.2004.00418.x
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    Cited by:

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    2. Spataro, Luca & Renström, Thomas I., 2012. "Optimal taxation, critical-level utilitarianism and economic growth," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 727-738.

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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