Working Paper: CEPR ID: DP4115
Authors: Kjell Erik Lommerud; Bjrn Sandvik; Odd Rune Straume
Abstract: We analyse the question of optimal taxation in a dual economy, when the policy-maker is concerned about the distribution of labour income. Income inequality is caused by the presence of sunk capital investments, which creates a ?good jobs? sector due to the capture of quasi-rents by trade unions. With strong unions and high planner preference for income equality the optimal policy is a combination of investment subsidies and progressive income taxation. If unions are weaker, the policy-maker may instead choose to tax investment.
Keywords: optimal taxation; redistribution; rent sharing; segmented labour markets
JEL Codes: H20; J42; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong unions (J51) | progressive income taxation and investment subsidies (H29) |
| strong unions (J51) | higher wages (J39) |
| higher wages (J39) | influence planner's decision to redistribute income (E25) |
| weak unions (J51) | investment tax (H20) |
| planner's preferences for equality and union conditions (C62) | optimal policy mix (E63) |
| tax policy (H20) | income distribution outcomes (D31) |
| union strength (J51) | planner's decisions (R58) |