DP3002 Optimal Labour Taxation and Search

Author(s): Jan Boone, A Lans Bovenberg
Publication Date: October 2001
Keyword(s): labour market, optimal tax system, search model
JEL(s): H21, H22, H23, J64
Programme Areas: Labour Economics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3002

This Paper explores the optimal role of the tax system in alleviating labour-market imperfections and raising revenue. For this purpose, the standard search model of the labour market is extended by introducing scarce entrepreneurial talent and arbitrage between the supply and demand. We study how these extensions affect the following two 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.