Premium
Marginal Tax Rate Uncertainty and Wage Indexation[Note 1. This paper is a version of the third chapter ...]
Author(s) -
Ramagopal K.
Publication year - 1997
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00042
Subject(s) - economics , indexation , wage , tax rate , stackelberg competition , flexibility (engineering) , microeconomics , monetary economics , labour economics , monetary policy , management
Frequent changes in American tax laws over the last 30 years have led to uncertainty regarding the marginal tax rate on labour income. Using a multisector framework, this paper considers the implications of the tax rate uncertainty for wage flexibility. The Fiscal Authority sets the marginal wage tax rate, and is assumed to be the leader in a Stackelberg game. Wage setters in this game determine the degree of optimal indexation and are assumed to be followers. Increases in tax rate uncertainty lead to greater nominal wage flexibility, and a decrease in optimal progressivity. Additionally, indexation to nominal shocks is complete even if the product market is monopolistically competitive.