Unemployment and tax design

Albert Jan Hummel

Journal of Public Economics, 2025, vol. 246, issue C

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.

Keywords: Directed search; Optimal taxation (search for similar items in EconPapers)
JEL-codes: H21 J64 J65 J68 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:246:y:2025:i:c:s004727272500057x

DOI: 10.1016/j.jpubeco.2025.105359

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