Employment, Hours of Work and the Optimal Taxation of Low Income Families

Richard Blundell () and Andrew Shephard

No 5745, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The optimal design of low income support is examined using a structural labour supply model. The approach incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The analysis considers purely Pareto improving reforms and also optimal design under social welfare functions with different degrees of inequality aversion. We explore the gains from tagging and also examine the case for the use of hours-contingent payments. Using the tax schedule for lone parents in the UK as our policy environment, the results point to a reformed non-linear tax schedule with tax credits only optimal for low earners. The results also suggest a welfare improving role for tagging according to child age and for hours-contingent payments, although the case for the latter is mitigated when hours cannot be monitored or recorded accurately by the tax authorities.

Keywords: optimal taxation; low income support; labour supply (search for similar items in EconPapers)
JEL-codes: I38 J22 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-05
New Economics Papers: this item is included in nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published - published in: Review of Economic Studies, 2012, 79(2), 481-510

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Related works:
Journal Article: Employment, Hours of Work and the Optimal Taxation of Low-Income Families (2012)
Working Paper: Employment, Hours of Work and the Optimal Taxation of Low Income Families (2011)
Working Paper: Employment, hours of work and the optimal taxation of low income families (2008)
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