Arbeitspapier

Unemployment and tax design

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. I show that optimal employment subsidies (such as the EITC) phase in with income and that the provision of unemployment insurance justifies a positive marginal tax rate even without income heterogeneity. A calibration exercise to the US economy suggests that optimal transfers for low-income individuals are larger if unemployment risk is taken into account.

Language
Englisch

Bibliographic citation
Series: Tinbergen Institute Discussion Paper ; No. TI 2021-061/VI

Classification
Wirtschaft
Taxation and Subsidies: Efficiency; Optimal Taxation
Unemployment: Models, Duration, Incidence, and Job Search
Unemployment Insurance; Severance Pay; Plant Closings
Mobility, Unemployment, and Vacancies: Public Policy
Subject
directed search
optimal taxation
unemployment insurance

Event
Geistige Schöpfung
(who)
Hummel, Albert Jan
Event
Veröffentlichung
(who)
Tinbergen Institute
(where)
Amsterdam and Rotterdam
(when)
2021

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Hummel, Albert Jan
  • Tinbergen Institute

Time of origin

  • 2021

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