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Optimal Dynamic Taxation with Indivisible Labour
Author(s) -
Basu Parantap,
Marsiliani Laura,
Renström Thomas I.
Publication year - 2004
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2004.00418.x
Subject(s) - economics , capital (architecture) , labour supply , labour economics , optimal tax , government (linguistics) , double taxation , zero (linguistics) , microeconomics , public economics , linguistics , philosophy , archaeology , history
How should a government arrange taxes on labour and capital over time? To provide an answer, we develop the field of optimal dynamic taxation further by (i) incorporating indivisible labour and (ii) analysing the short‐run dynamics of the capital and labour taxes under the second‐best programme. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. If leisure is normal, the labour tax is gradually increased for a period and then kept constant, and, if leisure is neutral, labour is not taxed at all. Finally, we analyse the dynamics of labour supply under the optimal tax programme.