Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Nonlinear Taxation, Minimum Hours, and the Earned Income Tax Credit

Contents:

Author Info

  • Normann Lorenz
  • Dominik Sachs
Registered author(s):

    Abstract

    We characterize the solution to the optimal nonlinear income taxation problem if individuals face a minimum hours constraint that gives rise to labor supply responses along the extensive margin. We provide conditions for optimal marginal tax rates to be positive everywhere and derive a formula for the optimal participation taxes. This formula shows the additional forces in comparison to the pure extensive labor supply model, can easily be generalized to other contexts of extensive and intensive labor supply responses, and provides a new condition under which an Earned Income Tax Credit (EITC) can be ruled out. In addition, we develop a test for the second-best Pareto-efficiency of any income tax schedule. The test is ex- pressed in reduced form and can be applied if the income distribution and empirical estimates of the extensive and intensive labor supply elasticities are known. Carefully parameterized simulations suggest that an EITC is optimal. An exogenous restriction that the welfare benefit cannot be set below a certain level causes the EITC to be less pronounced. On the other hand, exogenous government revenue requirements cause the EITC to be more pronounced in relative terms, because the welfare benefit decreases while the participation subsidy remains fairly constant. However, with the restriction of a fixed welfare benefit an increase in revenue requirements leads to a sharp decline of the participation subsidy.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2011-11.pdf
    File Function: First version, 2011
    Download Restriction: no

    Bibliographic Info

    Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2011-11.

    as in new window
    Length: 33 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:trr:wpaper:201111

    Contact details of provider:
    Postal: B IV, VWL, D-54286 Trier
    Phone: +49 (0) 651 201-2739
    Fax: +49 (0) 651 201-3934
    Web page: http://www.uni-trier.de/index.php?id=2118
    More information through EDIRC

    Related research

    Keywords: Optimal taxation; participation taxes; extensive margin; intensive margin;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Martijn P. Tummers & Isolde Woittiez, 1991. "A Simultaneous Wage and Labor Supply Model with Hours Restrictions," Journal of Human Resources, University of Wisconsin Press, vol. 26(3), pages 393-423.
    2. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June.
    3. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    4. Soest, A.H.O. van & Woittiez, I.B. & Kapteyn, A.J., 1990. "Labor supply, income taxes and hours restrictions in the Netherlands," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364378, Tilburg University.
    5. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-75, May.
    6. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
    7. Richard Blundell & Antoine Bozio & Guy Laroque, 2011. "Labor Supply and the Extensive Margin," American Economic Review, American Economic Association, vol. 101(3), pages 482-86, May.
    8. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
    9. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
    10. Boone, J. & Bovenberg, A.L., 2002. "The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-90151, Tilburg University.
    11. Craig Brett & John A. Weymark, 2000. "Financing Education Using Optimal Redistributive Taxation," Vanderbilt University Department of Economics Working Papers 0038, Vanderbilt University Department of Economics, revised May 2001.
    12. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
    13. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
    14. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
    15. Ilmakunnas, Seija & Pudney, Stephen, 1990. "A model of female labour supply in the presence of hours restrictions," Journal of Public Economics, Elsevier, vol. 41(2), pages 183-210, March.
    16. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May.
    17. Bruce D. Meyer & Dan T. Rosenbaum, 1998. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," JCPR Working Papers 32, Northwestern University/University of Chicago Joint Center for Poverty Research.
    18. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
    19. Costas Meghir & David Phillips, 2008. "Labour supply and taxes," IFS Working Papers W08/04, Institute for Fiscal Studies.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:trr:wpaper:201111. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthias Neuenkirch).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.