DP5170 Optimum Income Taxation and Layoff Taxes

Author(s): Pierre Cahuc, Andre Zylberberg
Publication Date: August 2005
Keyword(s): job destruction, layoff taxes, optimal taxation
JEL(s): H21, H32, J38, J65
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5170

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.