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Second‐Best Taxation of Incomes and Non‐Labor Inputs in a Model with Endogenous Wages
Author(s) -
GAHVARI FIROUZ
Publication year - 2014
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12088
Subject(s) - economics , subsidy , complementarity (molecular biology) , labour economics , marginal product of labor , elasticity (physics) , microeconomics , marginal product , production (economics) , market economy , genetics , materials science , composite material , biology
Abstract This paper considers a Mirrleesian optimal income tax model wherein labor inputs are not perfect substitutes and their wages are determined endogenously. It shows: (i) If skilled and unskilled workers are Edgeworth complements, skilled workers will necessarily face a marginal subsidy and unskilled workers a marginal tax on their incomes (these may not be the case if skilled and unskilled workers are Edgeworth substitutes); and (ii) redistributive concerns call for taxation of those inputs whose elasticity of complementarity with skilled labor is larger than with unskilled labor, and subsidization of those whose elasticity of complementarity is smaller.