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Optimal Participation Taxes and Efficient Transfer Phase-Out

Author

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  • Normann Lorenz

    (Volkswirtschaftslehre, Universität Trier, Germany)

  • Dominik Sachs

    (Department of Economics, University of Konstanz, Germany)

Abstract

We analyze the optimal design of income transfer programs with a special focus on participation taxes and the marginal tax rates in the phase-out region. The analytical framework incorporates labor supply responses along the intensive and extensive margin, where the latter is due to a minimum hours constraint. All results are expressed in reduced form, i.e. in terms of intensive and extensive labor supply elasticities. We derive a formula for the optimal participation taxes and provide a condition under which negative participation taxes are never part of the optimal tax schedule. Concerning the marginal tax rates in the phase-out region, we develop a test for a tax-transfer system to be beyond the top of the Laffer curve and thus to be (second-best) Pareto inefficient. In such a case there would be room for tax cuts (or increases in transfers) which are self-financing and therefore constitute a Pareto improvement. Applying this test to Germany, our analysis suggests that the structure of marginal tax rates in the transfer phase-out region is (second-best) Pareto inefficient.

Suggested Citation

  • Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1237
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    References listed on IDEAS

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    Cited by:

    1. Christophe Muller, 2016. "Optimal transfers with distribution regressions: An application to Egypt at the dawn of the XXIst century," WIDER Working Paper Series 179, World Institute for Development Economic Research (UNU-WIDER).
    2. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
    3. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers 14-17, University of Mannheim, Department of Economics.
    4. Christophe Muller, 2018. "Optimal Cash Transfers with Distribution Regressions: An Application to Egypt at the Dawn of the XXIst Century," AMSE Working Papers 1802, Aix-Marseille School of Economics, France.
    5. Emanuel Hansen, 2017. "Optimal income taxation with labor supply responses at two margins: When is an Earned Income Tax Credit optimal?," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2017_10, Max Planck Institute for Research on Collective Goods.

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    More about this item

    Keywords

    Optimal taxation; participation taxes; extensive margin; Laffer curve; multidimensional screening;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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