Optimal tax policy and wage subsidy in an imperfectly competitive economy

Optimal tax policy and wage subsidy in an imperfectly competitive economy
Document type
Working Paper
Author(s)
Selim, Sheikh
Publisher
Cardiff Business School
Date of publication
1 November 2010
Series
Caediff Economics Working Papers
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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In an imperfectly competitive economy with direct and indirect taxes, the first best wage subsidy overcompensates workers and provides the incentive to misreport working hours, while, as this paper shows, in the second best optimum, where the government cannot use a wage subsidy, the optimal policy is to tax labour income at a zero rate. This policy is optimal because it minimizes the incentive to misreport working hours.

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