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The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance

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  • Boone, J.

    (Tilburg University)

  • Bovenberg, A.L.

    (Tilburg University)

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 and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-90151.

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Length: 80
Date of creation: 2002
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Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-90151

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Web page: http://www.tilburguniversity.edu/

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  1. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
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  3. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
  4. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2002. "Social Security, Retirement Age and Optimal Income Taxation," CESifo Working Paper Series 693, CESifo Group Munich.
  5. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
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  9. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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  11. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  12. Jan Boone & Lans Bovenberg, 2003. "The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance," NBER Working Papers 9785, National Bureau of Economic Research, Inc.
  13. Boone, J. & Bovenberg, A.L., 2001. "Unemployment vs. In-work Benefits with Search Unemployment and Observable Abilities," Discussion Paper 2001-77, Tilburg University, Center for Economic Research.
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  20. Kanbur, Ravi & Keen, Michael & Toumala, Matti, 1991. "Optimal non-linear income taxation for the alleviation of income poverty," Policy Research Working Paper Series 616, The World Bank.
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  22. 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.
  23. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  24. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
  25. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  26. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, The Earned Income Tax Credit, And The Labor Supply Of Single Mothers," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1063-1114, August.
  27. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  28. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December.
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