The case for NIT+FT in Europe. An empirical optimal taxation exercise

Ugo Colombino and Nizamul Islam

No EM18/17, EUROMOD Working Papers from EUROMOD at the Institute for Social and Economic Research

Abstract: We present an exercise in empirical optimal taxation for European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm’s social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis show that the General Negative Income Tax strictly dominates the other rules, including the current ones. In most cases the Unconditional Basic Income policy is better than the Conditional Basic Income policy. Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects. In-Work-Benefit policy in most cases is strictly dominated by the General Negative Income Tax and Unconditional Basic Income.

Date: 2017-12-20
New Economics Papers: this item is included in nep-eur and nep-pbe
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Related works:
Journal Article: The case for NIT+FT in Europe. An empirical optimal taxation exercise (2018)
Working Paper: The case for NIT+FT in Europe. An empirical optimal taxation exercise (2018)
Working Paper: The case for NIT+FT in Europe. An empirical optimal taxation exercise (2017)
Working Paper: The Case for NIT+FT in Europe: An Empirical Optimal Taxation Exercise (2017)
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