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

  • Jan Boone
  • Lans Bovenberg

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9785.

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Date of creation: Jun 2003
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Publication status: published as Boone, Jan and Lans Bovenberg. "The Optimal Taxation Of Unskilled Labor With Job Search And Social Assistance," Journal of Public Economics, 2004, v88(11,Sep), 2227-2258.
Handle: RePEc:nbr:nberwo:9785
Note: LS PE
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