Optimal Income Tax and Disability Benefits for Households with Disability

This study analyzes the optimal income tax and disability benefits for households with disabled agents. In the model, both able and disabled members of households can supply labour and pay income tax. However, they may receive disability benefits if disabled members do not work. Moreover, this model explicitly considers households' activities to help disabled members to work, which is novel in the literature. I show that optimal disability benefits are positive because only severely disabled agents give up labour supply and receive disability benefits. However, optimal disability benefits decline with household income as disabled agents in poorer households need greater government support. As for the optimal net tax burden (i.e. income tax net of disability benefits), heavier tax burden falls on households that have disabled agents work because they are richer. However, marginal net tax rates are higher for households that receive disability benefits to incentivize disabled agents to work.