L10: Labour Taxes and Transfers - Institutions and Evidence Flashcards
what does the shape of the income tax depend on?
amount of government spending
degree of inequality in the before-tax income distribution
responsiveness of labour supply to marginal tax rates
earnings elasticity and labour elasticity
earnings > labour
consistent with the point that taxable income should be sensitive to tax rates over labour supply since taxable income is determined by how much you work and what fraction of income is subject to tax
earned income tax credit
most important transfer program for low-income working individuals
2 goals of the earned income tax credit
redistribution of resources to lower-income groups
increases in the amount of labour supplied by these groups
logic of the earned income tax credit structure
phase-in provides individuals with an incentive to work
- important if extensive margin responses are big
phase-out to limit benefit receipt among non-poor
- the slower the phase out, the more people get benefits
- the faster the phase out, the higher the effective marginal tax rate
impact of the earned income tax credit on four distinct groups
for people not in the labour force, EITC increases labour supply
- no income effect since they’re not working, substitution effect only goes one way so they are encouraged to work
effect on people already in the labour force earning less than the max of the phase-in is ambiguous
- unclear
lowers labour supply for people already earning anywhere between the top of the phase-in stage and the beginning of the phase-out stage
- negative income effect
labour supply falls for people earning in the phase-out stage
- facing a higher marginal tax rate which discourages them from working but also getting some EITC which increases income and encourages them to work less
kink points of the budget constraint
slope of budget constraint changes
