Optimal Mirrleesian taxation in non-competitive labor markets

Abstract

This study investigated optimal labor income taxation in non-competitive labor markets. Necessary and sufficient conditions are provided for constrained efficient allocations that are implementable via taxes. Not all allocations that can be implemented in a competitive setting satisfy the necessary conditions for implementation. If an allocation that maximizes a utilitarian objective is implementable then almost all workers face negative marginal tax rates. If the planner’s objective is Rawlsian, implementation is always possible with a well-chosen unemployment benefit financed by taxes on profits.