Abstract:

I study the incidence and optimal design of unemployment insurance, income and profit taxation in a competitive search economy. In addition to distorting labor supply, taxation affects labor demand and search behavior. The model generates a key trade-off between redistribution and (un)employment, both on the intensive (hours) and on the extensive (persons) margin. When profit taxes are optimal, the expression for the optimal income tax is the same as in an economy without frictions. I show both theoretically and numerically how profit taxes can be used to alleviate distortions from income taxation and unemployment insurance on search behavior and vacancy creation. Preliminary simulations indicate that a positive unemployment benefit, U-shaped marginal taxes and moderate profit subsidies are optimal.