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Optimal Participation Taxes and Efficient Transfer Phase-Out

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Author Info

  • Normann Lorenz

    ()
    (Volkswirtschaftslehre, Universität Trier, Germany)

  • Dominik Sachs

    ()
    (Department of Economics, University of Konstanz, Germany)

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    Abstract

    We analyze the optimal design of income transfer programs with a special focus on participation taxes and the marginal tax rates in the phase-out region. The analytical framework incorporates labor supply responses along the intensive and extensive margin, where the latter is due to a minimum hours constraint. All results are expressed in reduced form, i.e. in terms of intensive and extensive labor supply elasticities. We derive a formula for the optimal participation taxes and provide a condition under which negative participation taxes are never part of the optimal tax schedule. Concerning the marginal tax rates in the phase-out region, we develop a test for a tax-transfer system to be beyond the top of the Laffer curve and thus to be (second-best) Pareto inefficient. In such a case there would be room for tax cuts (or increases in transfers) which are self-financing and therefore constitute a Pareto improvement. Applying this test to Germany, our analysis suggests that the structure of marginal tax rates in the transfer phase-out region is (second-best) Pareto inefficient.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-37.

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    Length: 33 pages
    Date of creation: 17 Dec 2012
    Date of revision:
    Handle: RePEc:knz:dpteco:1237

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    Related research

    Keywords: Optimal taxation; participation taxes; extensive margin; Laffer curve; multidimensional screening;

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    References

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    Cited by:
    1. Laurence Jacquet & Etienne Lehmann & Bruno Van der Linden, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," CESifo Working Paper Series 3308, CESifo Group Munich.

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