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

  • Boone, Jan
  • Bovenberg, Lans

In order to explore the optimal taxation of low-skilled labour, we extend the standard model of optimal non-linear income taxation in the presence of quasi-linear preferences in leisure by allowing for in-voluntary unemployment, job search, an exogenous welfare benefit, and a non-utilitarian social welfare function. In trading of 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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 88 (2004)
Issue (Month): 11 (September)
Pages: 2227-2258

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Handle: RePEc:eee:pubeco:v:88:y:2004:i:11:p:2227-2258
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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