Some Results on the Comparative Statics of Optimal Categorical Transfer Payments

Abstract

To alleviate equity-efficiency trade-offs, tax transfer systems pay categorical transfers to groups defined by characteristics correlated with earnings ability. The author examines the comparative statics of categorical transfer payments in a linear income tax model through analysis of first-order conditions and numerical calculations. The analysis sharpens previous results on the size of categorical transfers, the resulting reduction in the income tax rate, and the associated welfare gain. Notably, the author finds that categorical transfers should vary more across groups when earnings ability is more equal within each group, when labor supply is more elastic, and when less revenue is required for public goods.