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

81 Pages Posted: 10 Oct 2002

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2002

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 involuntary 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

JEL Classification: H21, J64, J65

Suggested Citation

Boone, Jan and Bovenberg, A. Lans, The Optimal Taxation of Unskilled Labour with Job Search and Social Assistance (July 2002). Available at SSRN: https://ssrn.com/abstract=324975

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2912 (Phone)
+31 13 466 3066 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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