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