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OPTIMAL DYNAMIC LABOR TAXATION

Published online by Cambridge University Press:  05 July 2007

PARANTAP BASU  and
THOMAS I. RENSTRÖM
PARANTAP BASU
Affiliation:
University of Durham
THOMAS I. RENSTRÖM
Affiliation:
University of Durham and CEPR
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Abstract

We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.

Keywords

Optimal TaxationDynamic TaxationIndivisible Labor
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 5 , November 2007 , pp. 567 - 588
Copyright
© 2007 Cambridge University Press

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