Taxes and Employment Subsidies in Optimal Redistribution Programs

Paul Beaudry, Charles Blackorby, Dezsö L. Szalay

2009-02-01articleAmerican Economic Review85 citationsgreen

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Gender, Labor, and Family Dynamics Economic and Fiscal Studies Income, Poverty, and Inequality

Abstract

This paper explores how to optimally set taxes and transfers when taxation authorities are uninformed about individuals' value of time in both market and nonmarket activities; and can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves a cutoff wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work. (JEL D31, H21, H23, H24)