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Taxes and Employment Subsidies in Optimal Redistribution Programs

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  • Paul Beaudry
  • Charles Blackorby

Abstract

This paper characterizes an optimal redistribution program when taxation authorities: (1)" are uninformed about individuals' value of time in both market and non-market activities observe both market-income and time allocated to market employment, and (3) are utilitarian. " Formally, the problem is a special case of a multidimensional screening problem with two" dimensions of unobserved attributes. In contrast to much of the optimal income taxation" literature, we show that optimal redistribution in this environment involves distorting market" employment upwards for low net-income individuals (through negative marginal income taxes or" employment subsidies) and distorting employment downward for high net-income individuals" (through positive marginal income taxes). It is also shown that workfare is only part of an" optimal program if certain individuals have not access to market employment."

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6355.

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Date of creation: Jan 1998
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Publication status: published as Paul Beaudry & Charles Blackorby & Dezso Szalay, 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs," American Economic Review, American Economic Association, vol. 99(1), pages 216-42, March.
Handle: RePEc:nbr:nberwo:6355

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  1. Dasgupta, Partha & Hammond, Peter, 1980. "Fully progressive taxation," Journal of Public Economics, Elsevier, vol. 13(2), pages 141-154, April.
  2. Kanbur, Ravi & Keen, Michael & Tuomala, Matti, 1994. "Optimal non-linear income taxation for the alleviation of income-poverty," European Economic Review, Elsevier, vol. 38(8), pages 1613-1632, October.
  3. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  4. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
  5. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
  6. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers 968, Queen's University, Department of Economics.
  7. Mirrlees, James A, 1997. "Information and Incentives: The Economics of Carrots and Sticks," Economic Journal, Royal Economic Society, vol. 107(444), pages 1311-29, September.
  8. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  9. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
  10. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Steven Matthews & John Moore, 1985. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Discussion Papers 661, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Boadway, Robin & Keen, Michael, 2000. "Redistribution," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 12, pages 677-789 Elsevier.
  13. Jonathan R. Kesselman, 1977. "Tax Instruments and Economic Equality," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 289-99, May.
  14. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  15. Brett, Craig, 1998. "Who Should Be on Workfare? The Use of Work Requirements as Part of an Optimal Tax Mix," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 607-22, October.
  16. Kesselman, Jonathan R., 1973. "A comprehensive approach to income maintenance: swift," Journal of Public Economics, Elsevier, vol. 2(1), pages 59-88, February.
  17. David Card & Philip Robins, 1996. "Do Financial Incentives Encourage Welfare Recipients to Work? Early Findings from the Canadian Self Sufficiency Project," Working Papers 738, Princeton University, Department of Economics, Industrial Relations Section..
  18. Maderner, Nina & Rochet, Jean-Charles, 1995. " Is It Legitimate to Encourage Work Sharing?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 621-33, December.
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