Optimal Labour Taxation and Search

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This paper explores the optimal role of the tax system in alleviating labour-market imperfections, raising revenue, and correcting the income distribution. For this purpose, the standard search model of the labour market is extended by introducing non-linear vacancy costs due to scarce entrepreneurial talent and by allowing for arbitrage between being a worker and being an entrepreneur. We study how these extensions affect the following three major implications of the standard model: (1) only the ad valorem component of the wage tax should be employed to raise revenue; (2) the optimal tax system should not distort labour-market tightness; (3) the tax system cannot redistribute from workers to entrepreneurs.
Original languageEnglish
Place of PublicationTilburg
Number of pages49
Publication statusPublished - 2000

Publication series

NameCentER Discussion Paper


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