Optimal Tax Progression: Does it Matter if Wage Bargaining is Centralized or Decentralized?

Thomas Aronsson () and Magnus Wikström ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 829, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: We study how the optimal use of labor income tax progression depends on whether the wage bargaining system is decentralized or centralized. Assuming a nonlinear labor income tax and an unrestricted profit tax, we show that a Utilitarian government is able to implement the first best resource allocation with a zero marginal labor income tax rate under decentralized wage bargaining, whereas centralized bargaining typically implies a progressive tax as well as unemployment. However, if the government and a (central) wage-setter bargain over wage formation and public policy, the resulting equilibrium is characterized by full employment and a zero marginal tax rate.

Keywords: Optimal taxation; tax progressivity; wage bargaining; corporatism (search for similar items in EconPapers)
JEL-codes: H21 H23 J51 J52 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2011-06-20
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Citations: View citations in EconPapers (3)

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