Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrless meets Pisarrides

This paper characterize optimal non linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous unvoluntary unemployment due to frictions in labor markets. Redistributive taxations distorts labor demand and wages. Compared to the laissez-faire, gross wages, unemployment and participation are lower. Averages taxes rates are ncreasing. Marginal taxes rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is more important in our setting than in a comparable Mirrlees (1971) setting.