Optimal asymmetric sector-specific labour taxation in an overlapping generations model
- 40 Downloads
This paper presents a simple rule for optimal asymmetric labour taxation and subsidization in a two-sector model with logarithmic utilities and Cobb–Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on whether the economy is dynamically efficient or inefficient, it may be optimal to tax or subsidize labour in the sectors. Under dynamic inefficiency, it is optimal to tax the investment-goods sector and a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation. In appendix, we also address the cases of capital taxation/subsidisation and value-added taxes.
KeywordsTwo sectors Factor mobility Asymmetric taxation Optimality Population ageing
JEL ClassificationE62 H21 J10
Compliance with Ethical Standards
Conflict of Interest
The author declares that he has not received any grant, honoraria or financial support (apart from the official salary). The author declares that he has no conflict of interest.
- Breyer F (1989) On the intergenerational Pareto efficiency of pay-as-you-go financed pension systems. J Inst Theor Econ 145:643–658Google Scholar
- Diamond P (1965) National debt in a neoclassical growth model. Am Econ Rev 55(5):1126–1150Google Scholar
- Maddison A (1987) Growth and slowdown in advanced capitalistic economies. J Econ Lit 25:647–698Google Scholar
- Phelps E (1961) The golden rule of accumulation: a fable for growthmen. Am Econ Rev 51(4):638–643Google Scholar
- Selim S (2009) Optimal capital income taxation in a two sector economy. In: Duffy D, Shinnick E (eds) Public good, public policy and taxation: a European perspective, 4 in new developments in economic research. LIT, BerlinGoogle Scholar
- Selim S (2010) Optimal taxation in a two sector economy with heterogeneous agents. Econ Bull 30(1):534–542Google Scholar
- Selim S (2011) Optimal taxation and redistribution in a two sector two class agents’ economy. Cardiff economics working papers, Nr. E2011/6Google Scholar
- Verbon HA (1989) Conversion policies for public pensions plans in a small open economy. In: Gustafsson B, Klevmarken N (eds) The Political Economy of Social Security. Elsevier Science, AmsterdamGoogle Scholar