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Employment, Hours of Work and the Optimal Taxation of Low Income Families

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Author Info

  • Richard Blundell

    (UCL & IFS)

  • Andrew Shephard

    (Princeton University)

Abstract

The optimal design of low income support is examined using a structural labour supply model. The approach incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The analysis considers purely Pareto improving reforms and also optimal design under social welfare functions with different degrees of inequality aversion. We explore the gains from tagging and also examine the case for the use of hours-contingent payments. Using the tax schedule for lone parents in the UK as our policy environment, the results point to a reformed non-linear tax schedule with tax credits only optimal for low earners. The results also suggest a welfare improving role for tagging according to child age and for hours-contingent payments, although the case for the latter is mitigated when hours cannot be monitored or recorded accurately by the tax authorities.

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Bibliographic Info

Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1307.

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Date of creation: May 2011
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Handle: RePEc:pri:cepsud:218shephard

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Keywords: childcare costs; low income support; taxation;

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  1. Beaudry, Paul & Blackorby, Charles & Szalay, Dezso, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)," The Warwick Economics Research Paper Series (TWERPS) 779, University of Warwick, Department of Economics.
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  17. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
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  22. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
  23. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, Fall.
  24. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, vol. 64(2), pages 295-332, March.
  25. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  26. Brewer, Mike & Duncan, Alan & Shephard, Andrew & Suarez, Maria Jose, 2006. "Did working families' tax credit work? The impact of in-work support on labour supply in Great Britain," Labour Economics, Elsevier, vol. 13(6), pages 699-720, December.
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  1. Employment, Hours of Work and the Optimal Taxation of Low Income Families
    by maximorossi in NEP-LTV blog on 2011-06-23 17:40:47
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