Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

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arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets. Copyright 2008 The Authors.

Optimal Capital Taxation, Labour Unions, and the Hold‐Up Problem

“…The approach in this document differs from that in Koskela and von Thadden () in two respects. First, it applies the more general approach of Aronsson et al .…”

“…Koskela and von Thadden () consider optimal factor taxation in a dynamic general equilibrium with the following assumptions: (i) capital and labour taxes are the only revenue‐raising instruments for the government; (ii) labour markets are subject to union wage bargaining; (iii) a labour union has a utilitarian welfare function; and (iv) the union takes capital stock and a worker's reservation wage as given. This implies that a labour union maximizes a function that depends on employment and the difference between the bargained wage and the reservation wage.…”

“…Koskela and von Thadden () show that capital income should be taxed at a non‐zero rate in the presence of both wage bargaining and the implementability constraint. When a dynamic Ramsey problem is solved by means of the primal approach, which expresses public policy in terms of quantities, the use of the implementability constraint is a way of imposing time consistency of public policy.…”

Optimal Taxation with Capital Accumulation and Wage Bargaining

“…This study extends the same result to include the case of union wage settlement. Koskela and von Thadden (2002) show that capital income should be taxed at a non-zero rate in a unionized economy, but they assume that a labour union takes capital stock as given. It is, however, inconsistent to assume that the union takes the employment effects of its wage policy into account, but simultaneously ignores the effects through investment.…”

Outsourcing and Labor Taxation in Dual Labor Markets

“…This approach for endogenous outside option has been used also in a dynamic model byKoskela and von Thadden (2008).…”