Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237794 
Year of Publication: 
2021
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2021-061/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
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.
Subjects: 
directed search
optimal taxation
unemployment insurance
JEL: 
H21
J64
J65
J68
Document Type: 
Working Paper

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