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Optimal redistribution and monitoring of labor supply

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  • Zoutman, Floris T.
  • Jacobs, Bas

Abstract

This paper extends the Mirrlees (1971) model of optimal non-linear income taxation with a monitoring technology that allows the government to verify labor supply at a positive, but non-infinite cost. We analyze the joint determination of the non-linear monitoring and tax schedules, and the conditions under which these can be implemented. Monitoring of labor supply reduces the distortions created by income taxation and raises optimal marginal tax rates, possibly above 100%. The optimal intensity of monitoring increases with the marginal tax rate and the labor-supply elasticity. Our simulations demonstrate that monitoring strongly alleviates the trade-off between equity and efficiency. Welfare gains of monitoring are around 2.8% of total output. The optimal intensity of monitoring follows a U-shaped pattern, similar to that of optimal marginal tax rates. Our paper can explain why large welfare states optimally rely on work-dependent tax credits, active labor-market policies, benefit sanctions and work bonuses in welfare programs.

Suggested Citation

  • Zoutman, Floris T. & Jacobs, Bas, 2016. "Optimal redistribution and monitoring of labor supply," Journal of Public Economics, Elsevier, vol. 135(C), pages 15-31.
    • Handle: RePEc:eee:pubeco:v:135:y:2016:i:c:p:15-31
    DOI: 10.1016/j.jpubeco.2015.12.008
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    2. Rubolino, Enrico, 2023. "Does weak enforcement deter tax progressivity?," Journal of Public Economics, Elsevier, vol. 219(C).

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    More about this item

    Keywords

    Optimal non-linear taxation; Monitoring; Costly verification of ability/labor supply; Optimal income redistribution;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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