Working Paper: NBER ID: w7708
Authors: Emmanuel Saez
Abstract: This paper investigates the optimal income transfer problem at the low end of the income distribution. The government maximizes a social welfare function and faces the traditional equity-efficiency trade-off. The paper models labor supply behavioral responses along the intensive margin (hours or intensity of work on the job) and along the extensive margin (participation in the labor force). Optimal tax formulas are derived as a function of the behavioral elasticities, the shape of the income distribution and the redistribution tastes of the government. When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support that is taxed away at high rates. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is an Earned Income Credit program with negative marginal tax rates at low income levels and a small guaranteed income. Numerical simulations calibrated with the actual empirical earnings distribution are presented for a range of behavioral elasticities and redistributive tastes of the government. For realistic elasticities, the optimal program provides a moderate guaranteed income, imposes low tax rates on very low annual earnings levels, and then starts phasing out benefits at substantial rates.
Keywords: No keywords provided
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income transfer program type (NIT) (H53) | Labor supply responses (intensive margin) (J22) |
| Income transfer program type (EIC) (H53) | Labor supply responses (extensive margin) (J22) |
| Behavioral responses (intensive margin) (D91) | Optimal transfer program (NIT) (F16) |
| Behavioral responses (extensive margin) (D91) | Optimal transfer program (EIC) (F16) |
| Behavioral elasticities (D12) | Optimal tax formulas (H21) |
| Higher behavioral elasticities (D12) | Larger efficiency costs (D61) |