No. 990: Efficient Taxation of Labour Income under the Threat of Conflict

Asen Ivanov School of Economics & Finance, Queen Mary University London

August 18, 2025

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Abstract

I take a simple model of affine taxation of labour income and append to it the possibility that the chosen tax schedule triggers conflict in society. I demonstrate theoretically that, under certain conditions, the set of efficient tax schedules is a proper subset of the set of efficient tax schedules in a standard model without the possibility of conflict. Then, calibrating the model to the United States, I show numerically that the former set is much smaller than the latter.

J.E.L classification codes: D74, H20, H21

Keywords: labour-income tax; redistribution; conflict