We develop a simple model to study how relative wage rigidity affects equilibrium taxation. It is argued that relative wage rigidity, by compressing incomes within the middle class, leads to a lower degree of redistributive conflict within the politically important core of society, even though income inequality may increase for society as a whole. In the model, people vote first on wage rigidity and second on redistributive taxation. The rigid society has a ower tax rate than the flexible one. it is supported by the “middle-class” in the first stage, while the poor, the rich and the unemployed suffer from it.
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CERAS is a CNRS associate unit, while DELTA is a joint research unit ENS-CNRS-EHESS. This paper was prepared for the International Institute for Public Finance Congress, Lisbon, August 1995.
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Saint-Paul, G. Labor market institutions and the cohesion of the middle class. Int Tax Public Finan 3, 385–395 (1996). https://doi.org/10.1007/BF00418951
- Labor Market
- Simple Model
- Lower Degree
- Public Finance
- Income Inequality