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Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes

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  • Ritva Immonen
  • Ravi Kanbur
  • Michael Keen
  • Matti Tuomala

Abstract

This paper explores aspects of the optimal design of tax/transfer schemes that involve elements of both ‘tagging’ (the use of categorical benefits) and ‘means‐testing’ (income‐relation of benefits). Simulations suggest a striking qualitative dissimilarity between the group‐specific schedules optimally imposed on poorer and richer groups: broadly speaking, the optimal marginal tax rate is decreasing in income among the latter but increasing among the former. This latter observation, potentially important for policy, runs counter to the conventional wisdom from previous simulations. The reconciliation, we argue, lies in the role played in optimal tax design by the revenue constraint.

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  • Ritva Immonen & Ravi Kanbur & Michael Keen & Matti Tuomala, 1998. "Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes," Economica, London School of Economics and Political Science, vol. 65(258), pages 179-192, May.
    • Handle: RePEc:bla:econom:v:65:y:1998:i:258:p:179-192
    DOI: 10.1111/1468-0335.00122
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    Cited by:

    1. Pierre Pestieau & Maria Racionero, 2015. "Tagging with leisure needs," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(4), pages 687-706, December.
    2. Ray Rees & Thor O. Thoresen & Trine E. Vattø, 2023. "Alternatives to Paying Child Benefit to the Rich: Means‐Testing or Higher Tax?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 56(3), pages 328-354, September.
    3. Robin Boadway & Pierre Pestieau, 2006. "Tagging and redistributive taxation," Annals of Economics and Statistics, GENES, issue 83-84, pages 123-147.
    4. Homburg Stefan & Lohse Tim, 2005. "Optimal Taxes and Transfers under Partial Information," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 225(6), pages 622-629, December.
    5. Randall P. Ellis & Ching‐to Albert Ma, 2011. "Health insurance, cost expectations, and adverse job turnover," Health Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 27-44, January.
    6. Robert A. Moffitt, 2003. "The Temporary Assistance for Needy Families Program," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 291-364, National Bureau of Economic Research, Inc.
    7. Louis Kaplow, 2007. "Optimal income transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 295-325, June.
    8. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers W05/14, Institute for Fiscal Studies.
    9. Sören Blomquist & Luca Micheletto, 2008. "Age‐related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, March.
    10. Moffitt, Robert A., 2002. "Welfare programs and labor supply," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 34, pages 2393-2430, Elsevier.
    11. María Angeles García Valiñas, 2004. "Eficiencia y equidad en el diseño de precios óptimos para bienes y servicios públicos," Hacienda Pública Española / Review of Public Economics, IEF, vol. 168(1), pages 95-119, march.
    12. Kanbur, Ravi & Tuomala, Matti, 2002. "Understanding The Evolution Of Inequality During Transition: The Optimal Income Taxation," Working Papers 7240, Cornell University, Department of Applied Economics and Management.
    13. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453.

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