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

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Author Info
Beaudry, Paul (University of British Columbia, and NBER.)
Blackorby, Charles (University of Warwick and GREQAM)
Szalay, Dezso (University of Warwick)

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Abstract

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/publications/2006/twerp_779.pdf
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Publisher Info
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
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Handle: RePEc:wrk:warwec:779

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Related research
Keywords: Taxation ; Redistribution ; Wage Subsidies Screening;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January. [Downloadable!] (restricted)
  2. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers 968, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  3. Maderner, N. & Rochet, J.C., 1996. "Is It Legitimate to Encourage Work Sharing?," Papers 96.404, Toulouse - GREMAQ.
    Other versions:
  4. Philippe Choné ; Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers 2006-08, Centre de Recherche en Economie et Statistique, revised Aug 2006. [Downloadable!]
  5. Mirrlees, James A, 1997. "Information and Incentives: The Economics of Carrots and Sticks," Economic Journal, Royal Economic Society, vol. 107(444), pages 1311-29, September. [Downloadable!] (restricted)
  6. Maskin, Eric & Riley, John, 1985. "Input versus output incentive schemes," Journal of Public Economics, Elsevier, vol. 28(1), pages 1-23, October. [Downloadable!] (restricted)
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  7. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03. [Downloadable!] (restricted)
  8. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July. [Downloadable!] (restricted)
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  9. Chone, Philippe & Laroque, Guy, 2005. "Optimal incentives for labor force participation," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 395-425, February. [Downloadable!] (restricted)
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  10. Beaudry, Paul & Blackorby, Charles, 2004. "Taxes And Employment Subsidies In Optimal Redistribution Programs," The Warwick Economics Research Paper Series (TWERPS) 708, University of Warwick, Department of Economics. [Downloadable!]
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  11. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February. [Downloadable!] (restricted)
  12. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-67, March. [Downloadable!] (restricted)
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  13. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Blackwell Publishing, vol. 96(1), pages 67-81.
  14. 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.
  15. Besley, Timothy & Coate, Stephen, 1995. "The Design of Income Maintenance Programmes," Review of Economic Studies, Blackwell Publishing, vol. 62(2), pages 187-221, April. [Downloadable!] (restricted)
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  16. Dasgupta, Partha & Hammond, Peter, 1980. "Fully progressive taxation," Journal of Public Economics, Elsevier, vol. 13(2), pages 141-154, April. [Downloadable!] (restricted)
  17. Kesselman, Jonathan R., 1973. "A comprehensive approach to income maintenance: swift," Journal of Public Economics, Elsevier, vol. 2(1), pages 59-88, February. [Downloadable!] (restricted)
  18. 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. [Downloadable!]
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  19. Jonathan R. Kesselman, 1977. "Tax Instruments and Economic Equality," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 289-99, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Murty, Sushama, 2006. "Externalities and Fundamental Nonconvexities : A Reconciliation of Approaches to General Equilibrium Externality Modelling and Implications for Decentralization," The Warwick Economics Research Paper Series (TWERPS) 756, University of Warwick, Department of Economics. [Downloadable!]
  2. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal design of earned income tax credits," IFS Working Papers W08/01, Institute for Fiscal Studies. [Downloadable!]
  3. Blackorby, Charles & Szalay, Dezsö, 2008. "Regulating a Monopolist with unknown costs and unknown quality capacity," The Warwick Economics Research Paper Series (TWERPS) 858, University of Warwick, Department of Economics. [Downloadable!]
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