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

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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, an exogenous welfare benefit, and a non-utilitarian social welfare function.In trading off 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.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages80
Volume2002-57
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-57

Keywords

  • social welfare
  • job search
  • unemployment
  • income tax
  • unskilled workers

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