Optimal asymmetric sector-specific labour taxation in an overlapping generations model
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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.
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