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Simple Labor Income Tax Systems with Endogenous Employment Contracts

Author

Listed:
  • Yiqing Xing

    (Stanford University)

  • Anqi Li

    (Washington University in St. Louis)

Abstract

We use firm's endogenous contractual response to help implement the constrained first best through a simple yet powerful progressive labor income tax system. In our model, workers privately experience both a persistent ability shock and many transient productivity shocks during their life cycles. The optimal tax system is anonymous and time-invariant, but it achieves two goals. First, it directly redistributes the life-cycle income across workers of different ability types. Second, it indirectly induces firms to insure workers against transient shocks with efficiency wage contracts.

Suggested Citation

  • Yiqing Xing & Anqi Li, 2014. "Simple Labor Income Tax Systems with Endogenous Employment Contracts," 2014 Meeting Papers 866, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:866
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