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Employment, hours of work and the optimal taxation of low income families

  • Richard Blundell


    (Institute for Fiscal Studies and IFS and UCL)

  • Andrew Shephard


    (Institute for Fiscal Studies and University of Pennsylvania)

This paper examines the tax schedule for low income families with children. We take an optimal tax approach based on a structural labour supply model which incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The motivation is the British earned income tax credit reform (WFTC) and its interaction with the tax and transfer system for lone parents. Our analysis also examines the case for the use of hours-contingent payments. The results point to a tax schedule which depends on the age of children, with tax credits only optimal for low earners with school age children. The results also suggest a welfare improving role for hours-contingent payments although this is mitigated when hours cannot be monitored or recorded accurately by the tax authorities.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W08/01.

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Length: 59 pp.
Date of creation: 28 Jan 2008
Date of revision:
Handle: RePEc:ifs:ifsewp:08/01
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  16. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
  17. Beaudry, Paul & Blackorby, Charles, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs," The Warwick Economics Research Paper Series (TWERPS) 766, University of Warwick, Department of Economics.
  18. 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.
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