Income-based targeting (or means-testing) reduces social security benefits as income rises. This form of targeting entails a well-known incentive distortion: the prospect for the recipients of losing part of their benefits if they were to earn more can deter them to work harder. In this paper, we argue that targeting is more than a simple redistribution device that takes from the rich to give to the poor. The question involves starting from a particular tax-transfer scheme in force, and asking whether everybody would like to depart from it. Adopting a general environment, we derive simple conditions under which there exist such directions of change and we identify these directions. Specializing further the model and using numerical calculations we estimate the effects of inequality and tax evasion on the desirability of targeting.
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Paper provided by University of Exeter, School of Business and Economics in its series Discussion Papers with number
99/18.
Length: 14 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:exetec:99/18
Contact details of provider: Postal: School of Business and Economics University of Exeter Streatham Court Rennes Drive Exeter EX4 4PU Phone: (01392) 263218 Fax: (01392) 263242 Web page: http://www.exeter.ac.uk/sobe/ More information through EDIRC
Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
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