IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Employment, Hours of Work and the Optimal Taxation of Low-Income Families

  • Richard Blundell
  • Andrew Shephard

The optimal design of low-income support is examined using a structural labour supply model. The approach incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The analysis considers purely Pareto improving reforms and also optimal design under social welfare functions with different degrees of inequality aversion. We explore the gains from tagging and also examine the case for the use of hours-contingent payments. Using the tax schedule for lone parents in the U.K. as our policy environment, the results point to a reformed non-linear tax schedule with tax credits only optimal for low earners. The results also suggest a welfare improving role for tagging according to child age and for hours-contingent payments, although the case for the latter is mitigated when hours cannot be monitored or recorded accurately by the tax authorities. Copyright 2012, Oxford University Press.

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://hdl.handle.net/10.1093/restud/rdr034
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 2 ()
Pages: 481-510

as
in new window

Handle: RePEc:oup:restud:v:79:y:2012:i:2:p:481-510
Contact details of provider:

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. Dickens & David T. Ellwood, 2004. "Whither Poverty in Great Britain and the United States? The Determinants of Changing Poverty and Whether Work Will Work," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 313-370 National Bureau of Economic Research, Inc.
  2. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
  3. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," IZA Discussion Papers 1810, Institute for the Study of Labor (IZA).
  4. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  5. Brewer, Mike & Duncan, Alan & Shephard, Andrew & Suarez, Maria Jose, 2006. "Did working families' tax credit work? The impact of in-work support on labour supply in Great Britain," Labour Economics, Elsevier, vol. 13(6), pages 699-720, December.
  6. Paul Beaudry & Charles Blackorby, 1998. "Taxes and Employment Subsidies in Optimal Redistribution Programs," NBER Working Papers 6355, National Bureau of Economic Research, Inc.
  7. Rolf Aaberge & Ugo Colombino, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," Discussion Papers 475, Research Department of Statistics Norway.
  8. van Soest, Arthur & Das, Marcel & Gong, Xiaodong, 2002. "A structural labour supply model with flexible preferences," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 345-374, March.
  9. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
  10. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June.
  11. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  12. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  13. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
  14. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
  15. John Creedy & Guyonne Kalb, 2005. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 697-734, December.
  16. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May.
  17. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, vol. 64(2), pages 295-332, March.
  18. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
  19. Mike Brewer, 2001. "Comparing in-work benefits and the reward to work for families with children in the US and the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 22(1), pages 41-77, January.
  20. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February.
  21. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  22. Kelly Bishop & Bradley Heim & Kata Mihaly, 2009. "Single Women's Labor Supply Elasticities: Trends and Policy Implications," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(1), pages 146, October.
  23. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  24. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2.
  25. Beaudry, Paul & Blackorby, Charles & Szalay, Dezso, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)," The Warwick Economics Research Paper Series (TWERPS) 779, University of Warwick, Department of Economics.
  26. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  27. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:79:y:2012:i:2:p:481-510. 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: (Oxford University Press)

or (Christopher F. Baum)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.