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

Lans Bovenberg and Jan Boone

No 3446, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Labour market search; Social assistance; Unemployment; Low-skilled labour; Non-linear taxation; Participation margin; Bunching (search for similar items in EconPapers)
JEL-codes: H21 J64 J65 (search for similar items in EconPapers)
Date: 2002-07
New Economics Papers: this item is included in nep-pol
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Citations: View citations in EconPapers (10)

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Journal Article: The optimal taxation of unskilled labor with job search and social assistance (2004)
Working Paper: The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance (2003)
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