Working Paper: NBER ID: w9785
Authors: Jan Boone; Lans Bovenberg
Abstract: 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.
Keywords: labor market; search; social assistance; unemployment; low-skilled labor; nonlinear income taxation; participation margin
JEL Codes: H2; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher welfare benefits (I38) | Reduction in taxes paid by low-skilled workers (H31) |
| Higher welfare benefits (I38) | Increase in marginal tax rates across skill distribution (H31) |
| Tax policy (H29) | Labor market participation (J29) |
| Welfare benefits (I38) | Disincentives for low-skilled labor participation (J68) |
| Participation margin (E25) | Unrealistic implications of quasilinear preferences regarding aggregate labor supply elasticities (H31) |
| Unskilled agents (L85) | Highest long-term unemployment rates (J64) |
| Tax and benefit programs (H29) | Labor supply choices (J22) |
| Unskilled workers (F66) | Exit the labor market altogether (J63) |