Optimal tax progression: does it matter whether wage bargaining is decentralized or centralized?
2011 (English)Report (Other academic)
We study how the optimal use of labor income tax progression depends on whether the wage bargaining system is decentralized or centralized. Assuming a nonlinear labor income tax and an unrestricted profit tax, we show that a Utilitarian government is able to implement the first best resource allocation with a zero marginal labor income tax rate under decentralized wage bargaining, whereas centralized bargaining typically implies a progressive tax as well as unemployment. However, if the government and a (central) wage-setter bargain over wage formation and public policy, the resulting equilibrium is characterized by full employment and a zero marginal tax rate.
Place, publisher, year, edition, pages
2011. , 21 p.
Umeå economic studies, ISSN 0348-1018 ; 829
Optimal taxation, tax progressivity, wage bargaining, corporatism
Research subject Economics
IdentifiersURN: urn:nbn:se:umu:diva-47546OAI: oai:DiVA.org:umu-47546DiVA: diva2:442907