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Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)

  • Beaudry, Paul

    (University of British Columbia, and NBER.)

  • Blackorby, Charles

    (University of Warwick and GREQAM)

  • Szalay, Dezso

    (University of Warwick)

This paper explores how to optimally set tax and transfers when taxation authorities : (1) are uninformed about individuals’ value of time in both market and non-market activities and (2) can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage-contingent employment subsidies, and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates. In particular, we show that whether a person is taxed or subsidized depends primarily on his wage, that is, the optimal program involves a cut-off wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement (an earned income tax credit) as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_779.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 779.

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Length: 37 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:779
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Maderner, Nina & Rochet, Jean-Charles, 1995. " Is It Legitimate to Encourage Work Sharing?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 621-33, December.
  3. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  4. Eric Maskin & John G. Riley, 1984. "Input Versus Output Incentive Schemes," UCLA Economics Working Papers 354, UCLA Department of Economics.
  5. Dasgupta, Partha & Hammond, Peter, 1980. "Fully progressive taxation," Journal of Public Economics, Elsevier, vol. 13(2), pages 141-154, April.
  6. Kanbur, Ravi & Keen, Michael & Toumala, Matti, 1991. "Optimal non-linear income taxation for the alleviation of income poverty," Policy Research Working Paper Series 616, The World Bank.
  7. Brett, Craig, 1998. "Who Should Be on Workfare? The Use of Work Requirements as Part of an Optimal Tax Mix," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 607-22, October.
  8. Kesselman, Jonathan R., 1973. "A comprehensive approach to income maintenance: swift," Journal of Public Economics, Elsevier, vol. 2(1), pages 59-88, February.
  9. Jonathan R. Kesselman, 1977. "Tax Instruments and Economic Equality," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 289-99, May.
  10. Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
  11. Mirrlees, James A., 1996. "Information and Incentives: The Economics of Carrots and Sticks," Nobel Prize in Economics documents 1996-1, Nobel Prize Committee.
  12. Steven Matthews & John Moore, 1985. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Discussion Papers 661, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Paul Beaudry & Charles Blackorby, 1998. "Taxes and Employment Subsidies in Optimal Redistribution Programs," NBER Working Papers 6355, National Bureau of Economic Research, Inc.
  14. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
  15. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
  16. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February.
  17. Philippe Choné & Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers 2006-08, Centre de Recherche en Economie et Statistique.
  18. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  19. David Card & Philip Robins, 1996. "Do Financial Incentives Encourage Welfare Recipients to Work? Early Findings from the Canadian Self Sufficiency Project," Working Papers 738, Princeton University, Department of Economics, Industrial Relations Section..
  20. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
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