Economists have an instinctively negative reaction to any government program that creates a "notch," that is, a discontinuity in a budget constraint. For example, welfare programs like public housing are structured so that a finite lump of benefits is lost all at once when a household's income crosses a certain threshhold. Such notches deserve their bad reputation --they effectively impose a high marginal tax rate over a small income range, which no doubt discourages work and promotes welfare dependency. However,this paper argues that in other contexts, tax and subsidy plans with notches should at least be considered as serious contenders when public policy seeks to encourage or discourage some activity. Using simulations,we show how notch schemes can dominate traditional linear schemes using a standard efficiency criterion.
|Date of creation:||Aug 1984|
|Date of revision:|
|Publication status:||published as Blinder, Alan S. and Harvey S. Rosen. "Notches." American Economic Review , Vol. 75, No. 4, (September 1985), pp. 736-747.|
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- Alan J. Auerbach & Harvey S. Rosen, 1980. "Will the Real Excess Burden Please Stand Up? (Or, Seven Measures in Search of a Concept)," NBER Working Papers 0495, National Bureau of Economic Research, Inc.
- Venti, Steven F. & Wise, David A., 1984.
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- Steven F. Venti & David A. Wise, 1982. "Moving and Housing Expenditure: Transaction Costs and Disequilibrium," NBER Working Papers 1012, National Bureau of Economic Research, Inc.
- Charles L. Ballard & John B. Shoven & John Whalley, 1982. "The Welfare Cost of Distortions in the United States Tax System: A General Equilibrium Approach," NBER Working Papers 1043, National Bureau of Economic Research, Inc.
- Rosen, Harvey S., 1979. "Housing decisions and the U.S. income tax : An econometric analysis," Journal of Public Economics, Elsevier, vol. 11(1), pages 1-23, February.
- Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-62, June.
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