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Labor supply behavior and the design of tax and transfer policy

Kleven, Henrik Jacobsen and Thrustrup, Claus Kreiner (2005) Labor supply behavior and the design of tax and transfer policy. Danish Journal of Economics or Nationaløkonomisk Tidsskrift (143). pp. 321-358. ISSN 0028-0453

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Abstract

This paper has recent evidence on labor supply behavior - showing hours-of-work responses - has important implications for the design of tax and transfer policy. Based on a review of recent research in this field, we conclude the following: (i) conventional ways of evaluating the impact of tax-transfer reforms on economic efficiency have to be revised. Based on a review of recent research in this field, we conclude: (i) conventional ways of evaluating the impact of tax-transfer reform on economic efficiency have been revised. (ii) optimal redistributional policies may well involve negative marginal tax rates at the bottom of the earnings distribution. (Ii) optimal redistributional policies involved negative marginal tax rates to the bottom of the earnings distribution. (iii) the introduction of the Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansions of the credit during the past two decades did not involve a trade-off between efficiency and equality as suggested by previous estimates. (Iii) Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansion of the credit under decades did not involved a trade-off efficiency and equality as suggested by estimates. Instead, the EITC has improved both equality and efficiency. (iv) or most European countries, redistribution to the working poor involves a substantially lower trade-off between efficiency and equality than traditional redistributional policies targeted to those out of work. (Iv) redistributing to the working poor a substantially lower trade-off efficiency and equality in traditional redistributional policies targeted too out of work.

Item Type: Article
Official URL: http://www.econ.ku.dk/nf/
Additional Information: © 2005 Danish Economic Society
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
Sets: Departments > Economics
Research centres and groups > Centre for Economic Performance (CEP)
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 15 Apr 2011 16:08
URL: http://eprints.lse.ac.uk/35653/

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