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Labor Supply and Taxation$
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Richard Blundell, Andreas Peichl, and Klaus F. Zimmermann

Print publication date: 2016

Print ISBN-13: 9780198749806

Published to Oxford Scholarship Online: June 2016

DOI: 10.1093/acprof:oso/9780198749806.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 01 August 2021

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

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

(p.358) 13 Employment, Hours of Work and the Optimal Taxation of Low‐Income Families
Labor Supply and Taxation

Richard Blundell

Andrew Shephard

Oxford University Press

This chapter develops a structural approach to the optimal design of low-income support. It concerns the optimal choice of the tax rate schedule in a Mirrlees framework, which is extended to allow for unobserved heterogeneity, fixed costs of work, childcare costs, and the detailed non-convexities of the tax and transfer system. This can lead to relatively minor improvements in the UK tax and transfer schedule for lone parents. By imposing a specific social welfare function with reasonable social welfare weights, the government obtains a reformed non-linear tax schedule with lower tax rates over a large range of earnings for many families, and with tax credits only optimal for low earners. The chapter also describes the method of tagging taxes based on the age of children a social welfare function in order to improve the trade-off between equality and efficiency.

Keywords:   optimal design, low-income support, tax rate schedule, unobserved heterogeneity, fixed costs of work, lone parents, non-linear tax schedule, tagging taxes

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