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The case for NIT+FT in Europe. An empirical optimal taxation exercise

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  • ISLAM Nizamul
  • COLOMBINO Ugo

Abstract

We present an exercise in empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households? choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm?s social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones; the Unconditional Basic Income policy is better than the Conditional Basic Income policy; Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects; In-Work-Benefit policy is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.

Suggested Citation

  • ISLAM Nizamul & COLOMBINO Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," LISER Working Paper Series 2018-08, LISER.
  • Handle: RePEc:irs:cepswp:2018-08
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    More about this item

    Keywords

    Basic Income; Negative Income Tax; Optimal tax; Micro-simulation; Welfare;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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