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Seminar

Non-Linear Taxation with Monopsony Power

  • Location
    Erasmus University, E Building, Room EB-12
    Rotterdam
  • Date and time

    May 22, 2019
    12:00 - 13:00

Abstract

Non-linear taxation with monopsony power

There is growing concern that the recent increase in industry concentration hurts workers and contributes to rising inequality. How should policymakers respond, and what are the welfare implications? This paper sheds light on these questions by studying optimal income taxation in monopsonistic labor markets. I show that if firms extract all surplus by setting both wages and working hours, the trade-off between equity and efficiency vanishes. Optimal policy consists of a basic income financed by a tax on profits and zero taxes on labor income. If profit taxation is restricted the income tax serves to boost wages and erode profits. Moreover, if hours are chosen by workers the government can use the progressivity of the income tax to limit firms’ ability to extract rents.