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Home Publications Employment, hours of work and the optimal taxation of low-income families

Employment, hours of work and the optimal taxation of low-income families

Journal article | The Review of Economic Studies

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.

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Figure. Tax and transfer system interactions

Figure. Tax and transfer system interactions.

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IFS Working Paper W08/01
This paper examines the optimal schedule of marginal tax rates and the design of earned income tax credits.
Journal article | Fiscal Studies - Special Issue: 50th Anniversary of IFS
In‐work credits grew in popularity worldwide during the late 1990s and 2000s as a means of reforming welfare systems in ways that could both encourage work and reduce poverty.