Tax Smoothing in Frictional Labor Markets: A Comment


Kiarsi, Mehrab



In a calibrated matching model that, conditional on a high value for government unemployment transfers and a low value for workers´ bargaining weight, can account for US labor market volatility, Arseneau and Chugh (2012) quantitatively find that the Ramsey optimal policy calls for extreme labor tax volatility and that "actual US tax policy has produced too smooth a labor tax rate, resulting in suboptimally large labor market volatility" (928). The article obtains this result after adding a vacancy subsidy to the exogenous policy model to make the tax system complete. It claims that the Ramsey planner uses highly volatile taxes to induce efficient fluctuations in the labor market by keeping static wedges constant and intertemporal wedges at zero over time. This article claims that achieving zero intertemporal distortion is the paramount concern of the Ramsey planner and insensitive to the assumption of full dividend taxation.  


Kiarsi, M: Tax Smoothing in Frictional Labor Markets: A Comment, in: Journal of Political Economy, Vol. 131 (5), 2023


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