Working Paper: NBER ID: w12284
Authors: Louis Kaplow
Abstract: A substantial literature addresses the design of transfer programs and policies, including the negative income tax, other means-tested transfers, the earned income tax credit, categorical assistance, and work inducements. This work is largely independent of that on the optimal nonlinear income tax, yet formulations of such a tax necessarily address how low-income individuals should be treated. This paper draws on the optimal income taxation literature to illuminate the analysis of transfer programs, including the level and shape of marginal tax rates (including phase-outs), the structure of categorical assistance, and the role of work inducements in an optimal income transfer scheme.
Keywords: income transfers; optimal taxation; low-income individuals
JEL Codes: H21; H53; I38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher marginal tax rates at the bottom of the income distribution (H31) | increased revenue (H27) |
| higher marginal tax rates at the bottom of the income distribution (H31) | no significant distortion in labor supply for higher-income individuals (H31) |
| optimal marginal tax rates should be high at low-income levels (H21) | direct effect on work incentives (H31) |
| existing transfer programs (EITC) (F16) | inefficient labor supply decisions among low-income individuals (J22) |
| optimal design of categorical assistance (H84) | affects marginal tax rates applied to different income levels (H31) |
| misclassification of individuals based on ability (J79) | distorts effectiveness of transfer programs (H31) |