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American Economic Review: Vol. 99 No. 1 (March 2009)


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Taxes and Employment Subsidies in Optimal Redistribution Programs

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Beaudry, Paul, Charles Blackorby, and Dezsö Szalay. 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs." American Economic Review, 99(1): 216-42.

DOI: 10.1257/aer.99.1.216


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. 1JEL D31, H21, H23, H242

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Beaudry, Paul (U British Columbia)
Blackorby, Charles (U Warwick and GREQAM)
Szalay, Dezsö (U Warwick)

JEL Classifications

D31: Personal Income, Wealth, and Their Distributions
H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes

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