Optimal progressive taxation in a model with endogenous skill supply

Stylianos Asimakopoulos, K Angelopoulos, J Malley

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

For a reforming government intent on improving efficiency, a natural way to discriminate between alternatives is via optimal taxation. In light of this, we examine quantitatively the extent of progressivity or regressivity of optimal labour income taxation in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation. In particular, in the steady-state, skilled labour income is taxed about forty percent more than unskilled labour income. We further find that the optimal transition path from the exogenous to optimal policy steady-state also exhibits progressive labour income taxation. These results are explained by a lower work time elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.
Original languageEnglish
Title of host publicationPublic Sector Economics and the Need for Reforms
EditorsA Philippopoulos
PublisherMIT Press
ISBN (Print)9780262034449
DOIs
Publication statusPublished - 2016

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    Asimakopoulos, S., Angelopoulos, K., & Malley, J. (2016). Optimal progressive taxation in a model with endogenous skill supply. In A. Philippopoulos (Ed.), Public Sector Economics and the Need for Reforms MIT Press. https://doi.org/10.7551/mitpress/9780262034449.003.0006