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Taxes and Employment Subsidies in Optimal Redistribution Programs

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  • Beaudry, Paul
  • Blackorby, Charles

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. In contrast to much of the optimal income taxation literature, we show that optimal redistribution in this environment involves distorting market employment upwards for low net-income individuals through phased-out wage-contingent employment subsidies, and distorting employment downward for high net-income individuals through positive and increasing marginal income tax rate. We also show that workfare may also be used as part of an optimal redistribution program.

Suggested Citation

  • Beaudry, Paul & Blackorby, Charles, 2004. "Taxes and Employment Subsidies in Optimal Redistribution Programs," Economic Research Papers 269736, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269736
    DOI: 10.22004/ag.econ.269736
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    More about this item

    Keywords

    Financial Economics; Marketing;

    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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