Working Paper: CEPR ID: DP5170
Authors: Pierre Cahuc; Andre Zylberberg
Abstract: This paper analyses optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the discounted value of the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed). Our quantitative analysis suggests that the introduction of layoff taxes, that are usually absent from actual tax schemes, could lead to significant increases in employment and GDP.
Keywords: Job destruction; Layoff taxes; Optimal taxation
JEL Codes: H21; H32; J38; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| layoff taxes (J65) | employment (J68) |
| layoff taxes (J65) | GDP (E20) |
| absence of layoff taxes (J65) | excessive job destruction (J63) |
| optimal layoff tax (H21) | social cost of job destruction (J65) |
| layoff taxes (J65) | optimal taxation (H21) |