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Is it fair to “make work pay”?

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  • R. I. LUTTENS

    ()

  • E. OOGHE

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:rug:rugwps:05/283

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Keywords: make work pay; optimal income taxation; fairness;

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Cited by:
  1. Ooghe, Erwin & Peichl, Andreas, 2014. "Fair and efficent taxation under partial control," ZEW Discussion Papers 14-002, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Erwin OOGHE & Andreas PEICHL, 2010. "Fair and efficient taxation under partial control: theory and evidence," Center for Economic Studies - Discussion papers ces10.32, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. JACQUET, Laurence & VAN DE GAER, Dirk, . "A comparison of optimal tax policies when compensation or responsibility matter," CORE Discussion Papers RP -2421, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Xavier Ramos & Dirk Van de gaer, 2012. "Empirical Approaches to Inequality of Opportunity: Principles, Measures, and Evidence," Working Papers wpdea1208, Department of Applied Economics at Universitat Autonoma of Barcelona.
  5. Haan, Peter & Decoster, Andre, 2013. "Empirical welfare analysis with preference heterogeneity," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79815, Verein für Socialpolitik / German Economic Association.
  6. Giacomo Valletta, 2009. "A fair solution to the compensation problem," Social Choice and Welfare, Springer, vol. 32(3), pages 455-478, March.
  7. Giacomo Valletta, 2014. "Health, fairness and taxation," Social Choice and Welfare, Springer, vol. 43(1), pages 101-140, June.

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