AbstractEconomists 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1416.
Date of creation: Aug 1984
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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.
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Other versions of this item:
- Blinder, Alan S & Rosen, Harvey S, 1985. "Notches," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 736-47, September.
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- Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 352-62, June.
- 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, National Bureau of Economic Research, Inc 0495, National Bureau of Economic Research, Inc.
- Venti, Steven F. & Wise, David A., 1984.
"Moving and housing expenditure: Transaction costs and disequilibrium,"
Journal of Public Economics, Elsevier,
Elsevier, vol. 23(1-2), pages 207-243.
- Steven F. Venti & David A. Wise, 1985. "Moving and Housing Expenditure: Transaction Costs and Disequilibrium," NBER Working Papers, National Bureau of Economic Research, Inc 1012, National Bureau of Economic Research, Inc.
- Charles L. Ballard & John B. Shoven & John Whalley, 1982. "The Welfare Cost of Distortions in the United States Tax System: A General Equilibrium Approach," NBER Working Papers, National Bureau of Economic Research, Inc 1043, National Bureau of Economic Research, Inc.
- Rosen, Harvey S., 1979. "Housing decisions and the U.S. income tax : An econometric analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 11(1), pages 1-23, February.
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