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

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 reform...

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Bibliographic Details
Published inThe Review of economic studies Vol. 79; no. 2; pp. 481 - 510
Main Authors BLUNDELL, RICHARD, SHEPHARD, ANDREW
Format Journal Article
LanguageEnglish
Published Oxford Review of Economic Studies Ltd., Oxford University Press 01.04.2012
Oxford University Press
Subjects
Child care
Children
Design optimization
Employment
Fixed costs
Income taxes
Labor economics
Labor supply
Low income groups
Marginal tax rate
Optimal taxation
Social welfare
Studies
Tax reform
Transfer taxes
Working hours
United Kingdom > UK
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Summary: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 U.K. 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.
ISSN:0034-6527
1467-937X
DOI:10.1093/restud/rdr034