Stigma, Optimal Income Taxation, and the Optimal Welfare Program: A Numerical Simulation Approach
AbstractThis article integrates the theory of welfare stigma and the theory of optimal income taxation. We study optimal income taxation and an optimal welfare program within a unified framework while taking welfare stigma into account. In our framework, the government is assumed to have two policy instruments, namely general income taxation and a welfare program. Individuals are assumed to be heterogeneous along two dimensions, namely wages (skill) and welfare stigma. The government cannot observe the two characteristics of individuals. Each individual is assumed to take the income tax schedule and the parameters of the welfare program as given and make labor supply decisions to maximize his utility. The government is assumed to choose both an optimal income tax schedule and an optimal welfare program so as to maximize a social welfare function subject to its own revenue budget constraint and individuals' behavioral response to the income tax schedule and the parameters of the welfare program. As the model cannot be solved analytically, we take a numerical simulation approach. Our simulations show that (I) it is optimal for the government to offer both a negative income tax schedule and a welfare program, which is consistent with the theoretical result obtained by An in a much-simplified version of our model, and (2) the actual welfare program in the United States might be less generous than the optimal welfare program.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by in its journal Public Finance Review.
Volume (Year): 38 (2010)
Issue (Month): 1 (January)
Contact details of provider:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications).
If references are entirely missing, you can add them using this form.