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

Jan Boone, Lans Bovenberg

NBER Working Paper No. 9785
Issued in June 2003
NBER Program(s):   LS   PE

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 and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.

(508 K)

Published: Boone, Jan and Lans Bovenberg. "The Optimal Taxation Of Unskilled Labor With Job Search And Social Assistance," Journal of Public Economics, 2004, v88(11,Sep), 2227-2258.

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