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Notches

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Author Info
Alan S. Blinder
Harvey S. Rosen

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Abstract

Economists have an instinctively negative reaction to any government program that creates a "notch," that is, a discontinuity in a budget constraint. For example, welfare programs like public housing are structured so that a finite lump of benefits is lost all at once when a household's income crosses a certain threshhold. Such notches deserve their bad reputation --they effectively impose a high marginal tax rate over a small income range, which no doubt discourages work and promotes welfare dependency. However,this paper argues that in other contexts, tax and subsidy plans with notches should at least be considered as serious contenders when public policy seeks to encourage or discourage some activity. Using simulations,we show how notch schemes can dominate traditional linear schemes using a standard efficiency criterion.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1416.

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Date of creation: Sep 1985
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Publication status: published as Blinder, Alan S. and Harvey S. Rosen. "Notches." American Economic Review , Vol. 75, No. 4, (September 1985), pp. 736-747.
Handle: RePEc:nbr:nberwo:1416

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References listed on IDEAS
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  1. Charles L. Ballard & John B. Shoven & John Whalley, 1985. "The Welfare Cost of Distortions in the United States Tax System: A General Equilibrium Approach," NBER Working Papers 1043, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Alan J. Auerbach & Harvey S. Rosen, 1980. "Will the Real Excess Burden Please Stand Up? (Or, Seven Measures in Search of a Concept)," NBER Working Papers 0495, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Harvey S. Rosen, 1980. "Housing Decisions and the U.S. Income Tax: An Econometric Analysis," NBER Reprints 0024, National Bureau of Economic Research, Inc.
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