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Optimum Income Taxation and Layoff Taxes

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Author Info
Pierre Cahuc () (CREST-INSEE, University of Paris 1, CEPR and IZA Bonn)
André Zylberberg (EUREQua, University of Paris 1 and CNRS)

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Abstract

This paper analyzes 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1678.

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Length: 49 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1678

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

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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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References listed on IDEAS
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