Skip to main content

Advertisement

SpringerLink
Log in

Optimal dynamic nonlinear income taxation with wage regulations

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

We extend Stiglitz (J Public Econ, 17, 213–240,1982) to a dynamic and stochastic optimal taxation model, while assessing the effects of exogenous wage regulations. We show that when wage regulations are imposed, consumption inequality rises more than when they are removed. The results lead to an important policy implication that in the face of exogenous wage regulations, the social planner who can design optimal tax schedule prefers to widen the consumption inequality. From this perspective, the drive to enhance production efficiency outweighs the motivation for redistribution. A conventional wisdom that full employment commitment and minimum wage legislation should serve as a buffer for the minority may not be taken for granted. In the qualitative analysis, we find that as wage regulations tighten, the lower bound of the marginal tax rate on capital rises. Our quantitative result validates that, showing that the marginal tax rate on capital increases to varying degrees in response to wage requirements of varying tightness.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Prior to the literature NDPF, some papers discussed a related issue. For example, Atkinson and Stiglitz (1976) investigate differentiated commodity taxation, in which consumption at different points in time can be viewed as different commodities.

References

  • Ales, L., Kurnaz, M., & Sleet, C. (2015). Technical change, wage inequality, and taxes. American Economic Review, 105, 3061–3101.

    Article  Google Scholar 

  • Allen, S. (1987). Taxes, redistribution, and the minimum wage: A theoretical analysis. Quarterly Journal of Economics, 102, 477–489.

    Article  Google Scholar 

  • Atkinson, A., & Stiglitz, J. (1976). The design of tax structure: Direct versus indirect taxation. Journal of Public Economics, 6, 55–75.

    Article  Google Scholar 

  • Autor, D., & Dorn, D. (2013). The growth of low-skill service jobs and the polarization of the US labor market. American Economic Review, 10, 1553–1597.

    Article  Google Scholar 

  • Autor, D. (2014). Skills, education, and the rise of earnings inequality among the other 99 percent. Science, 344, 843–851.

    Article  Google Scholar 

  • Bezes, P., Fimreite, A., Lidec, P., & Lægreid, P. (2013). Understanding organizational reforms in the modern state: Specialization and integration in Norway and France. Governance, 26, 147–175.

    Article  Google Scholar 

  • Brown, C., Gilroy, C., & Kohen, A. (1982), The effect of the minimum wage on employment and unemployment: A survey. National Bureau of Economic Research.

  • Dube, A., Lester, T., & Reich, M. (2010). Minimum wage effects across state borders: Estimates using contiguous counties. Review of Economics and Statistics, 92, 945–964.

    Article  Google Scholar 

  • Dustmann, C., Lindner, A., Schönberg, U., Umkehrer, M., & Vom Berge, P. (2022). Reallocation effects of the minimum wage. Quarterly Journal of Economics, 137, 267–328.

    Article  Google Scholar 

  • Fortin, N. (2006). Higher-education policies and the college wage premium: Cross-state evidence from the 1990s. American Economic Review, 96, 959–987.

    Article  Google Scholar 

  • Golosov, M., Kocherlakota, N., & Tsyvinski, A. (2003). Optimal indirect and capital taxation. Review of Economic Studies, 70, 569–587.

    Article  Google Scholar 

  • Golosov, M., Tsyvinski, A., & Werning, I. (2006). New dynamic public finance: A user’s guide. NBER Macroeconomics Annual, 21, 317–387.

    Article  Google Scholar 

  • Hungerbühler, M., & Lehmann, E. (2009). On the optimality of a minimum wage: New insights from optimal tax theory. Journal of Public Economics, 93, 464–481.

    Article  Google Scholar 

  • Kettl, D. (2006). Is the worst yet to come? Annals of the American Academy of Political and Social Science, 604, 273–287.

    Article  Google Scholar 

  • Kocherlakota, N. (2010). The new dynamic public finance. Princeton University Press.

    Book  Google Scholar 

  • Kocherlakota, N. (2005). Zero expected wealth taxes: A mirrlees approach to dynamic optimal taxation. Econometrica, 73, 1587–1621.

    Article  Google Scholar 

  • Krusell, P., Ohanian, L., Ríos‐Rull, J., & Violante, G. (2000). Capital‐skill complementarity and inequality: A macroeconomic analysis. Econometrica, 68, 1029–1053.

    Article  Google Scholar 

  • Lavecchia, A. (2020). Minimum wage policy with optimal taxes and unemployment. Journal of Public Economics, 190, 104228.

    Article  Google Scholar 

  • Lee, D., & Saez, E. (2012). Optimal minimum wage policy in competitive labor markets. Journal of Public Economics, 96, 739–749.

    Article  Google Scholar 

  • Mirrlees, J. (1971). An exploration in the theory of optimum income taxtion. Review of Economic Studies, 38, 175–208.

    Article  Google Scholar 

  • Neumark, D., Schweitzer, M., & Wascher, W. (2004). Minimum wage effects throughout the wage distribution. Journal of Human Resources, 39, 425–450.

    Article  Google Scholar 

  • Guesnerie, R., & Roberts, K. (1987). Minimum wage legislation as a second best policy. European Economic Review, 31, 490–498.

    Article  Google Scholar 

  • Rothschild, C., & Scheuer, F. (2013). Redistributive taxation in the Roy model. Quarterly Journal of Economics, 128, 623–668.

    Article  Google Scholar 

  • Scott, I., & Gong, T. (2021). Coordinating government silos: Challenges and opportunities. Global Public Policy and Governance, 1, 20–38.

    Article  Google Scholar 

  • Stiglitz, J. E. (1982). Self-selection and pareto efficient taxation. Journal of Public Economics, 17, 213–240.

    Article  Google Scholar 

  • Thuemmel, U. (2023). Optimal taxation of robots. Journal of the European Economic Association, 21, 1154–1190.

    Article  Google Scholar 

  • Tsai, Y., Yang, C., & Yu, H. (2022). Rising skill premium and the dynamics of optimal capital and labor taxation. Quantitative Economics, 13, 1061–1099.

    Article  Google Scholar 

Download references

Acknowledgement

Financial support from the Ministry of Science and Technology (MOST 111-2410-H-415-026) is gratefully acknowledged. I thank an anonymous referee and the editor for helpful comments. All remaining errors are my own.

Funding

Funding was provided by Ministry of Science and Technology, Taiwan (Grant No. 111-2410-H-415-026).

Author information

Authors and Affiliations

  1. Department of Economics, National Central University, Zhongda Rd, Taoyuan City, 320317, Taiwan (R.O.C.)

    Yunmin Chen

Authors
  1. Yunmin Chen
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Yunmin Chen.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Chen, Y. Optimal dynamic nonlinear income taxation with wage regulations. Int Tax Public Finance (2023). https://doi.org/10.1007/s10797-023-09789-7

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s10797-023-09789-7

Keywords

JEL Classifications

Search

Navigation