Optimal taxation and redistribution in an OLG model with unemployment

Abstract

Optimal taxation, OLG model, Redistribution, Unemployment, H21, H23, J51, J64,

Capital income taxation and the Atkinson–Stiglitz theorem

“…The economy is populated with two groups of agents who di¤er in labor 2 His aim in doing so is to show that this source of heterogeneity causes monetary policy to have signi…cant redistributive implications which, in turn, often leads to a negation of the Friedman rule. 3 For example, to restore the desirability of capital income taxes, Saez (2002) assumes that, besides di¤ering in labor market productivities, individuals also di¤er in tastes, while Cremer et al (2003) assume that they di¤er in inherited wealth; Pirttilä and Tuomala (2001) assume that relative wage rates are sensitive to savings via their e¤ect on capital accumulation; Christiansen and Tuomala (2008) introduce the possibility of income shifting by assuming that labor income can be camou ‡aged as capital income for tax purposes; Aronsson et al (2009) relax the assumption that the labor market is perfectly competitive. Finally, Piketty and Saez (2012) and Bastani et al (2013) highlight the desirability of taxing capital income in models where agents face uninsurable uncertainty about, respectively, future returns and future labor market productivities.…”

“…This can be inferred from the recent work of Williamson (2008) who, in a monetary model, makes a distinction between "connected" and "unconnected" agents in terms of their access to …nancial institutions. 2 He argues that di¤erent agents may have to carry di¤erent levels of cash balances because of their sophistication and/or their di¤erent levels of access to other …nancial instruments.…”

Positional Concerns in an Olg Model: Optimal Labor and Capital Income Taxation*

“…Their results show that production inefficiency at the second‐best optimum (which is a consequence of the desire to relax the self‐selection constraint) justifies capital income taxation, whereas the marginal labor income tax rates take the same general form as in Stiglitz (1982), that is, a positive marginal labor income tax rate should be imposed on the low‐ability type and a negative marginal labor income tax rate on the high‐ability type. A somewhat related argument for using capital income taxation is found by Aronsson et al (2009); they show that the appearance of equilibrium unemployment may justify capital income taxation, as it implies intertemporal production inefficiency at the second‐best optimum. Finally, Boadway et al (2000) analyze nonlinear labor income taxation and proportional capital income taxation in a model where both ability and initial wealth are unobserved by the government.…”

Optimal tax and expenditure policy in the presence of emigration

“…The reason is that in the second period when emigration has already taken place, there may be an incentive for the government to change the labor income tax rate and the public expenditure announced in the first period. Although this potential problem is recognized, we follow previous studies in optimal taxation, such as Pirttilä and Tuomala (2001) and Aronsson et al (2008), by assuming that the government can credibly commit to the announced tax and expenditure policy.…”

“…1 One strand of the literature has focused on the role of income redistribution within a fiscal federation. 2 Another has analyzed how governments should tax labor income from mobile agents who divide their time between several jurisdictions. 3 All above mentioned studies have one thing in common: they analyze economic policy and emigration within a static framework.…”