Unemployment and tax design

Albert Jan Hummel
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Albert Jan Hummel: University of Amsterdam

No 21-061/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

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. 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.

Keywords: directed search; optimal taxation; unemployment insurance (search for similar items in EconPapers)
JEL-codes: H21 J64 J65 J68 (search for similar items in EconPapers)
Date: 2021-07-04
New Economics Papers: this item is included in nep-ias, nep-lab, nep-ore, nep-pbe and nep-pub
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20210061

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