Working Paper: CEPR ID: DP3002
Authors: Jan Boone; Lans A. Bovenberg
Abstract: 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.
Keywords: labour market; optimal tax system; search model
JEL Codes: H21; H22; H23; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ad valorem component of the wage tax (H25) | raise revenue (H27) |
| tax structure (H20) | labour market outcomes (J48) |
| optimal tax system (H21) | labour market tightness (J20) |
| ad valorem tax (H25) | efficient labour market functioning (J48) |