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

Author

Listed:
  • Beaudry, Paul

    (University of British Columbia, and NBER.)

  • Blackorby, Charles

    (University of Warwick and GREQAM)

  • Szalay, Dezso

    (University of Warwick)

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.

Suggested Citation

  • Beaudry, Paul & Blackorby, Charles & Szalay, Dezso, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)," The Warwick Economics Research Paper Series (TWERPS) 779, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:779
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_779.pdf
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    References listed on IDEAS

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    Cited by:

    1. Richard Blundell & Andrew Shephard, 2012. "Employment, Hours of Work and the Optimal Taxation of Low-Income Families," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 481-510.
    2. Blackorby, Charles & Szalay, Dezso, 2008. "Regulating a Monopolist with unknown costs and unknown quality capacity," Economic Research Papers 269856, University of Warwick - Department of Economics.
    3. Murty, Sushama, 2010. "Externalities and fundamental nonconvexities: A reconciliation of approaches to general equilibrium externality modeling and implications for decentralization," Journal of Economic Theory, Elsevier, vol. 145(1), pages 331-353, January.
    4. Philippe Chone & Guy Laroque, 2010. "Negative Marginal Tax Rates and Heterogeneity," American Economic Review, American Economic Association, vol. 100(5), pages 2532-2547, December.

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    More about this item

    Keywords

    Taxation ; Redistribution ; Wage Subsidies Screening;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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