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The optimal taxation of unskilled labor with job search and social assistance

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Author Info
Boone, J.
Bovenberg, L. (Tilburg University, Center for Economic Research)

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Abstract

In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal non-linear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search, an exogenous welfare benefit, and a non-utilitarian social welfare function. In trading off more low-skilled employment against more work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Positive marginal tax rates at the bottom may help to encourage job search if this search is taxed on a net basis. Lower welfare benefits and search costs tend to reduce marginal tax rates throughout the skill distribution.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 57.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200257

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Related research
Keywords: unskilled workers;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
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  16. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July. [Downloadable!] (restricted)
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  20. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Phillippe Choné & Guy Laroque, 2008. "Optimal taxation in the extensive model," IFS Working Papers W08/08, Institute for Fiscal Studies. [Downloadable!]
  2. Heinz Handler & Andreas Knabe & Bertrand Koebel & Margit Schratzenstaller & Sven Wehke, 2005. "The Impact of Public Budgets on Overall Productivity Growth," WIFO Working Papers 255, WIFO. [Downloadable!]
  3. Bovenberg, A.L., 2003. "Tax policy and labor market performance," Discussion Paper 90, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  4. Louis Kaplow, 2007. "Optimal income transfers," International Tax and Public Finance, Springer, vol. 14(3), pages 295-325, June. [Downloadable!] (restricted)
    Other versions:
  5. Kleven, Henrik & Kreiner, Claus Thustrup, 2006. "The Marginal Cost of Public Funds: Hours of Work versus Labor Force Participation," CEPR Discussion Papers 5594, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Etienne Lehmann & Alexis Parmentier & Bruno van der Linden, 2008. "Optimal Income Taxation with Endogenous Participation and Search Unemployment," IDEP Working Papers 0805, Institut d'economie publique (IDEP), Marseille, France, revised 01 Sep 2008. [Downloadable!]
    Other versions:
  7. M. Hungerbühler & E. Lehmann & A. Parmentier & P. Van Der Linden, 2003. "Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides," Working Papers ERMES 0306, ERMES, University Paris 2. [Downloadable!]
    Other versions:
  8. Engström, Per, 2007. "Wage Formation and Redistribution," Working Paper Series 2007:12, Uppsala University, Department of Economics. [Downloadable!]
  9. Christian Keuschnigg, 2008. "Corporate Taxation and the Welfare State," Working Papers 0813, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  10. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics 2006:12, Stockholm University, Department of Economics. [Downloadable!]
  11. Ruud Mooij, 2008. "Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off," International Tax and Public Finance, Springer, vol. 15(1), pages 87-103, February. [Downloadable!] (restricted)
  12. Ruud de Mooij, 2007. "Reinventing the Dutch tax-benefit system," CPB Discussion Papers 88, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  13. Christian Keuschnigg & Evelyn Ribi, 2007. "Outsourcing, Unemployment and Welfare Policy," University of St. Gallen Department of Economics working paper series 2007 2007-41, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  14. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2005. "Optimal Redistributive Taxation in a Search Equilibrium Model," IZA Discussion Papers 1460, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  15. Lehmann, Etienne & Van der Linden, Bruno, 2004. "On the Optimality of Search Matching Equilibrium When Workers Are Risk Averse," IZA Discussion Papers 1172, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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