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Unemployment and tax design

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  • Hummel, Albert Jan

Abstract

This paper studies optimal income taxation in an environment where matching frictions generate a trade-off for workers between high wages and low unemployment risk. A higher marginal tax rate shifts the trade-off in favor of low unemployment risk, whereas a higher tax burden or unemployment benefit has the opposite effect. Changes in unemployment generate fiscal externalities, which modify optimal tax formulas. A calibration exercise to the US economy suggests that optimal marginal tax rates and employment taxes are hardly affected if unemployment responses to taxation are taken into account.

Suggested Citation

  • Hummel, Albert Jan, 2025. "Unemployment and tax design," Journal of Public Economics, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:pubeco:v:246:y:2025:i:c:s004727272500057x
    DOI: 10.1016/j.jpubeco.2025.105359
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    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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