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Taxes and Employment Subsidies in Optimal Redistribution Programs

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  • Beaudry, Paul

    (University of British Columbia, and NBER.)

  • Blackorby, Charles

    (University of Warwick and GREQAM)

Abstract

This paper explores how to optimally set tax and transfers when taxation authorities : (1) are uninformed about individuals’ value of time in both market and non-market activities and (2) can observe both market-income and time allocated to market employment. 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 phased-out wage-contingent employment subsidies, and distorting employment downward for high net-income individuals through positive and increasing marginal income tax rate. We also show that workfare may also be used as part of an optimal redistribution program.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 766.

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Date of creation: 2006
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Handle: RePEc:wrk:warwec:766

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Keywords: Taxation ; Redistribution ; Wage Subsidies Screening;

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References

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  1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-67, March.
  2. 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.
  3. 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.
  4. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
  5. Maderner, N. & Rochet, J.C., 1996. "Is It Legitimate to Encourage Work Sharing?," Papers 96.404, Toulouse - GREMAQ.
  6. Mirrlees, James A., 1996. "Information and Incentives: The Economics of Carrots and Sticks," Nobel Prize in Economics documents 1996-1, Nobel Prize Committee.
  7. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers 968, Queen's University, Department of Economics.
  8. Ravi Kanbur & Michael Keen & Matti Tuomala, 1990. "Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty," Working Papers 799, Queen's University, Department of Economics.
  9. Dasgupta, Partha & Hammond, Peter, 1980. "Fully progressive taxation," Journal of Public Economics, Elsevier, vol. 13(2), pages 141-154, April.
  10. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  11. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
  12. 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..
  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. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  15. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  16. 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.
  17. Kesselman, Jonathan R., 1973. "A comprehensive approach to income maintenance: swift," Journal of Public Economics, Elsevier, vol. 2(1), pages 59-88, February.
  18. Robin Boadway & Michael Keen, 1999. "Redistribution," Working Papers 983, Queen's University, Department of Economics.
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