Optimal Redistribution and Monitoring of Labor Effort
Floris Zoutman and
Bas Jacobs
No 4646, CESifo Working Paper Series from CESifo
Abstract:
This paper extends the Mirrlees (1971) model of optimal non-linear income taxation with a monitoring technology that allows the government to verify labor effort at a positive, but non-infinite cost. Monitored individuals receive a penalty, which increases if individuals earn a lower income (provide less work effort) or have a higher earning ability. We analyze the joint determination of the non-linear monitoring and tax schedules and the conditions under which these can be implemented. Monitoring of labor effort reduces the distortions created by income taxation and raises optimal marginal tax rates, possibly above 100 percent. The optimal intensity of monitoring increases with the marginal tax rate and the labor-supply elasticity. Our simulations demonstrate that monitoring strongly alleviates the trade-off between equity and efficiency as welfare gains of monitoring are around 1.4 percent of total output. The optimal intensity of monitoring follows a U-shaped pattern, similar to that of optimal marginal tax rates. Our paper explains why large welfare states optimally rely on work-dependent tax credits, active labor-market policies, benefit sanctions and work bonuses in welfare programs to redistribute income efficiently.
Keywords: optimal non-linear taxation; monitoring; costly verification ability; effort; optimal redistribution (search for similar items in EconPapers)
JEL-codes: H21 H24 H26 H31 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp4646.pdf (application/pdf)
Related works:
Working Paper: Optimal Redistribution and Monitoring of Labor Effort (2014) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4646
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().