Income Taxation with Frictional Labor Supply

Résumé

I study nonlinear income taxation in a dynamic environment where individual labor supply is subject to frictions, e.g., hours constraints within firms. Specifically, consistent with the empirical evidence, agents incur a fixed cost of adjusting their hours of work in response to wage or tax changes. This generates an endogenous extensive margin of labor supply, conditional on participation. I derive a formula that characterizes the optimal long-run progressive tax schedule in this economy, and show in particular that the standard frictionless models, which ignore the lumpiness of labor supply, underestimate the long-run costs of raising tax progressivity.

Référence

Nicolas Werquin (Toulouse School of Economics), « Income Taxation with Frictional Labor Supply », Third Taxation Theory Conference, Manufacture des Tabacs, Toulouse, France, 26–27 mai 2016, salle MS 001.