Beaudry, Paul, Blackorby, Charles, 1937- and Szalay, Dezsö. (2007) Taxes and employment subsidies in optimal redistribution programs. Unpublished .

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Abstract

This paper explores how to optimally set taxes 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, with the optimal program involving 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 as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor
Divisions:	Faculty of Social Sciences > Economics Other > Learning and Development Centre
Library of Congress Subject Headings (LCSH):	Taxation, Employment subsidies
Journal or Publication Title:	Unpublished
Date:	23 August 2007
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Description:	Unpublished work
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URI:	http://wrap.warwick.ac.uk/id/eprint/89

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