This paper concerns redistribution and optimal taxation in an OLG model with two employed ability-types. We assume that the wage rates are determined by bargaining between unions and firms, implying that the equilibrium is characterized by unemployment. The tax instruments are nonlinear taxes on...

In this paper, the effects of capital income taxation on wage formation are studied using OECD data. The results indicate that a rise in the tax rate on capital income will reduce real wages and increase employment.