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Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

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  • Koskela Erkki

    (University of Helsinki,Helsinki, Finland)

  • Thadden Leopold von

    (European Central Bank,Frankfurt, Germany)

Abstract

We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: (i) taxes on capital and labour are the only available tax instruments for raising revenues and (ii) labour markets are subject to an inefficiency resulting from wage bargaining. If considered in isolation, the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets.

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  • Koskela Erkki & Thadden Leopold von, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, De Gruyter, vol. 9(2), pages 135-159, May.
    • Handle: RePEc:bpj:germec:v:9:y:2008:i:2:p:135-159
    DOI: 10.1111/j.1468-0475.2008.00428.x
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    3. Panagiota Koliousi & Natasha Miaouli & Apostolis Philippopoulos, 2015. "Liberalization of product and labour markets: Winners and losers," Working Papers 201503, Athens University Of Economics and Business, Department of Economics.
    4. Jiang Wei, 2019. "Optimal taxation under equilibrium unemployment and economic profits," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(1), pages 1-21, January.
    5. Konstantinos Angelopoulos & James R. Malley & Wei Jiang, 2011. "The distributional consequences of tax reforms under market distortions," Working Papers 2011_21, Business School - Economics, University of Glasgow.
    6. Palokangas, Tapio K., 2003. "Optimal Taxation with Capital Accumulation and Wage Bargaining," IZA Discussion Papers 966, Institute of Labor Economics (IZA).
    7. Wei Jiang, 2014. "Optimal taxation and labour wedge in models with equilibrium unemployment," Studies in Economics 1407, School of Economics, University of Kent.
    8. Wei Jiang, 2014. "Tax Reforms in Search-and-Matching Models with Heterogeneous Agents," Studies in Economics 1414, School of Economics, University of Kent.

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    More about this item

    Keywords

    Optimal taxation; imperfectly competitive labour markets; capital accumulation;
    All these keywords.

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • 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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