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228
Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses
, 2002
"... This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin (intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses are concentrated along the intensive margin, the o ..."
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Cited by 234 (18 self)
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This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin (intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasingout tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided.
Using Elasticities to Derive Optimal Income Tax Rates
 REVIEW OF ECONOMIC STUDIES
, 2001
"... This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. I ..."
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Cited by 209 (24 self)
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This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. In the general nonlinear income tax problem, this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of Mirrlees. The optimal nonlinear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution. These formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters.
Welfare Reform in European Countries: A Microsimulation Analysis
 The Economic Journal
, 2007
"... This article compares the effects of increasing traditional welfare to introducing inwork benefits in the 15 (preenlargement) countries of the European Union. We use a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins, and the EUROMOD ..."
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Cited by 97 (11 self)
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This article compares the effects of increasing traditional welfare to introducing inwork benefits in the 15 (preenlargement) countries of the European Union. We use a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins, and the EUROMOD microsimulation model to estimate current marginal and participation tax rates. We quantify the equityefficiency tradeoff for a range of elasticity parameters. In most countries, because of large existing welfare programmes with high phaseout rates, increasing traditional welfare is undesirable unless the redistributive tastes of the government are extreme. In contrast, the inwork benefit reform is desirable in a very wide set of cases. Transfers to lowincome individuals have grown significantly in Western Europe since World War II. Today, most European countries devote a sizeable amount of public spending to lowincome support through various programmes such as unemployment insurance for those temporarily out of work, disability insurance for the disabled, housing and families subsidies for those with modest incomes or children, and various other income maintenance and welfare programmes for those with no or very small incomes. Table 1 displays the fraction of government transfers in disposable incomes at each decile for 15 European countries for those aged 18 to 59. In all countries, such transfers represent a very large fraction of disposable income for the bottom deciles. The proper amount of redistribution and the design of transfer programmes is an important and controversial issue in the political sphere. As is well known among economists, redistribution gives rise to a tradeoff between equity and efficiency.
2006) “Microsimulation as a Tool for Evaluating Redistribution Policies
 Journal of Economic Inequality
"... Microsimulation as a Tool for Evaluating Redistribution Policies ..."
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Cited by 89 (6 self)
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Microsimulation as a Tool for Evaluating Redistribution Policies
The Case for a Progressive Tax: from Basic Research to Policy Recommendations” The Journal of Economic Perspectives
, 2011
"... T he fair distribution of the tax burden has long been a central issue in policyhe fair distribution of the tax burden has long been a central issue in policymaking. A large academic literature has developed models of optimal tax making. A large academic literature has developed models of optimal t ..."
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Cited by 65 (7 self)
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T he fair distribution of the tax burden has long been a central issue in policyhe fair distribution of the tax burden has long been a central issue in policymaking. A large academic literature has developed models of optimal tax making. A large academic literature has developed models of optimal tax theory to cast light on the problem of optimal tax progressivity. In this theory to cast light on the problem of optimal tax progressivity. In this paper, we explore the path from basic research results in optimal tax theory to paper, we explore the path from basic research results in optimal tax theory to formulating policy recommendations. formulating policy recommendations. Models in optimal tax theory typically posit that the tax system should maximize a Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, taking into account social welfare function subject to a government budget constraint, taking into account that individuals respond to taxes and transfers. Social welfare is larger when resources that individuals respond to taxes and transfers. Social welfare is larger when resources are more equally distributed, but redistributive taxes and transfers can negatively are more equally distributed, but redistributive taxes and transfers can negatively affect incentives to work, save, and earn income in the fi rst place. This creates the clasaffect incentives to work, save, and earn income in the fi rst place. This creates the classical tradeoff between equity and effi ciency which is at the core of the optimal income sical tradeoff between equity and effi ciency which is at the core of the optimal income tax problem. In general, optimal tax analyses maximize social welfare as a function of tax problem. In general, optimal tax analyses maximize social welfare as a function of individual utilitiesthe sum of utilities in the utilitarian case. The marginal weight for individual utilitiesthe sum of utilities in the utilitarian case. The marginal weight for a given person in the social welfare function measures the value of an additional dollar a given person in the social welfare function measures the value of an additional dollar of consumption expressed in terms of public funds. Such welfare weights depend on of consumption expressed in terms of public funds. Such welfare weights depend on the level of redistribution and are decreasing with income whenever society values the level of redistribution and are decreasing with income whenever society values more equality of income. Therefore, optimal income tax theory is fi rst a normative more equality of income. Therefore, optimal income tax theory is fi rst a normative theory that shows how a social welfare objective combines with constraints arising from theory that shows how a social welfare objective combines with constraints arising from limits on resources and behavioral responses to taxation in order to derive specifi c limits on resources and behavioral responses to taxation in order to derive specifi c
Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and ReducedForm Methods
 ANNUAL REVIEW OF ECONOMICS
, 2009
"... The debate between “structural” and “reducedform” approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reducedform strategies –transparent and credible identification – with an important ..."
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Cited by 61 (1 self)
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The debate between “structural” and “reducedform” approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reducedform strategies –transparent and credible identification – with an important advantage of structural models – the ability to make predictions about counterfactual outcomes and welfare. This literature has developed formulas for the welfare consequences of various policies that are functions of reducedform elasticities rather than structural primitives. I present a general framework that shows how many policy questions can be answered by estimating a small set of sufficient statistics using program evaluation methods. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss problems in macroeconomics, labor, development, and industrial organization that could be tackled using the sufficient statistic approach.
Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing
, 2012
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