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Income Taxation, Commodity Taxation and Provision of Public Goods under Labor Market Distortions

Author

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  • Thomas Aronsson
  • Tomas Sjögren

Abstract

This paper concerns optimal taxation and provision of a public good in the context of the mixed tax problem, where the set of tax instruments consists of a nonlinear income tax and linear commodity taxes. The analysis is based on a two-type model with endogenous wage rates. Contrary to previous studies, we allow for imperfect competition in the labor market resulting from the influence of unions on wage formation. The results imply that the employment effects associated with each policy instrument are important to consider. In addition, the effective marginal tax rate of the highest-income earners may be either positive or negative. Finally, if concern for employment and/or self-selection makes the government choose a lower level of unemployment benefits than it would otherwise have done, it will to some extent compensate the unemployed by providing more of the public good and via lower commodity taxes.

Suggested Citation

  • Thomas Aronsson & Tomas Sjögren, 2002. "Income Taxation, Commodity Taxation and Provision of Public Goods under Labor Market Distortions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(3), pages 347-370, August.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(2002/200308)59:3_347:itctap_2.0.tx_2-v
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    Cited by:

    1. Engström, Per, 2003. "Unemployment Benefits and Optimal Non-Linear Income Taxation," Working Paper Series 2003:3, Uppsala University, Department of Economics.
    2. Diego Martinez-Lopez, 2004. "The optimal provision of public inputs in a second best scenario," Economics Bulletin, AccessEcon, vol. 8(3), pages 1-9.
    3. Mathias, HUNGERBUEHLER, 2004. "The impact of Union Power on the Optimal Income Tax Schedule," LIDAM Discussion Papers IRES 2004034, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. repec:ebl:ecbull:v:8:y:2004:i:3:p:1-9 is not listed on IDEAS

    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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