Second-best taxation of incomes and non-labor inputs in a model with endogenous wages

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Abstract

This paper considers a Mirrleesian optimal income tax model wherein labor inputs are not perfect substitutes and their wages are determined endogenously. It shows: (i) If skilled and unskilled workers are Edgeworth complements, skilled workers will necessarily face a marginal subsidy and unskilled workers a marginal tax on their incomes (these may not be the case if skilled and unskilled workers are Edgeworth substitutes); and (ii) redistributive concerns call for taxation of those inputs whose elasticity of complementarity with skilled labor is larger than with unskilled labor, and subsidization of those whose elasticity of complementarity is smaller.

Original languageEnglish (US)
Pages (from-to)917-935
Number of pages19
JournalJournal of Public Economic Theory
Volume16
Issue number6
DOIs
StatePublished - Dec 1 2014

ASJC Scopus subject areas

  • Finance
  • Sociology and Political Science
  • Economics and Econometrics

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