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Optimum Income Taxation and Layoff Taxes

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Author Info
Cahuc, Pierre
Zylberberg, Andre

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Abstract

This paper analyses optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the discounted value of the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed). Our quantitative analysis suggests that the introduction of layoff taxes, that are usually absent from actual tax schemes, could lead to significant increases in employment and GDP.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5170.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5170

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Related research
Keywords: job destruction; layoff taxes; optimal taxation;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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  2. Cahuc, Pierre & Malherbet, Franck, 2004. "Unemployment compensation finance and labor market rigidity," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 481-501, March. [Downloadable!] (restricted)
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    Other versions:
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  14. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October. [Downloadable!] (restricted)
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