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

48 Pages Posted: 12 Jun 2011

See all articles by Richard W. Blundell

Richard W. Blundell

UCL; Centre for Economic Policy Research (CEPR)

Andrew Shephard

affiliation not provided to SSRN

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: low income support, optimal taxation, labour supply

JEL Classification: J22, I38

Suggested Citation

Blundell, Richard W. and Shephard, Andrew, Employment, Hours of Work and the Optimal Taxation of Low Income Families. IZA Discussion Paper No. 5745, Available at SSRN: https://ssrn.com/abstract=1863067 or http://dx.doi.org/10.2139/ssrn.1863067

Richard W. Blundell (Contact Author)

UCL ( email )

Department of Economics
Gower Street
London, WC1E 6BT
United Kingdom
+44 20 7504 5863 (Phone)
+44 20 7916 2773 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctp39a/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrew Shephard

affiliation not provided to SSRN

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