Taxation on labor income - A choice between efficiency and inequality?

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This thesis applies a model for optimal top taxation rate on all Scandinavian countries. The starting point is a theory by Saez, Piketty and Stantcheva limiting the possible change in behavior of taxpayers into three channels; labor supply, tax avoidance and compensation bargaining. I show that optimal top taxation rate depends on these three key elasticities and how they affect the tax system. The elasticities are derived from the literature and labor income taxation in the Scandinavian context is the focus of the article. The findings of this thesis is that compensation bargaining happens in the Scandinavian countries, and that it can be adjusted with higher top taxes, applied at a higher level of income than today. This can be done without any larger dead weight losses through labor supply or tax avoidance. I suggest an income tax schedule with smaller and less salient jumps to remove compensation bargaining as an inefficient behavior without creating incentives to increase tax avoidance.

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