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Is it fair to “make work pay”?

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Author Info
R. I. LUTTENS ()
E. OOGHE

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Abstract

The design of the income transfer program for the lower incomes is a hot issue in current public policy debate. Should we stick to a generous welfare state with a sizeable basic income, but high marginal tax rates for the lower incomes and thus little incentives to work? Or, should we “make work pay” by subsidizing the work of low earners, but possibly at the cost of a smaller safety net? We think it is difficult to answer this question without making clear what individuals are (held) responsible for and what not. First, we present a new fair allocation, coined a Pareto Efficient and Shared resources Equivalent allocation (PESE), which compensates for different productive skills, but not for different tastes for working.We also characterize a fair social ordering, which rationalizes the PESE allocation. Second, we illustrate the optimal second-best allocation in a discrete Stiglitz (1982, 1987) economy. The question whether we should have regressive or progressive taxes for the low earners crucially depends on whether the low-skilled have a strictly positive or zero skill. Third, we simulate fair taxes for a sample of Belgian singles. Our simulation results suggest that “making work pay” policies can be optimal, according to our fairness criterion, but only in the unreasonable case in which most of the unemployed are not willing to work.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 05/283.

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Length: 33 pages
Date of creation: Jan 2005
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Handle: RePEc:rug:rugwps:05/283

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Related research
Keywords: make work pay optimal income taxation fairness

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Find related papers by JEL classification:
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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    Other versions:
  3. Roemer, John E. & Aaberge, Rolf & Colombino, Ugo & Fritzell, Johan & Jenkins, Stephen P. & Lefranc, Arnaud & Marx, Ive & Page, Marianne & Pommer, Evert & Ruiz-Castillo, Javier, 2003. "To what extent do fiscal regimes equalize opportunities for income acquisition among citizens?," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 539-565, March. [Downloadable!] (restricted)
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  5. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February. [Downloadable!] (restricted)
  6. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October. [Downloadable!] (restricted)
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  11. Maniquet, Francois, 1998. "An equal right solution to the compensation-responsibility dilemma," Mathematical Social Sciences, Elsevier, vol. 35(2), pages 185-202, March. [Downloadable!] (restricted)
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  12. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  13. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Blackwell Publishing, vol. 68(1), pages 205-29, January.
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  14. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March. [Downloadable!] (restricted)
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  15. Walter Bossert & John A. Weymark, . "Utility in Social Choice," Old UBC Departmental Papers 9623, UBC Department of Economics. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. H. T.J. Smit & W. De Maeseneire, 2005. "The role of investor capabilities in public-to-private transactions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/290, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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