Recent studies find wage subsidies (WS) to be superior to negative income tax (NIT). However, these studies suffer from a serious aggregation problem. A model is suggested in which these aggregation problems are avoided. In this model there exists a WS schedule that increases labor supply compared with an equally costly NIT. However, the WS may be Pareto inferior. Furthermore, for high income workers given any income tax system it is always possible to find a wage tax system which both is Pareto superior and increases labor supply. The merits of the model and its implications for other optimal income tax studies are critically discussed.
Get full access to this article
View all access options for this article.
References
1.
BrowningE. K. (1973) “Alternative programs for income redistribution: The NIT and the NWT.”Amer. Econ. Rev.63 (March): 38–49.
2.
GarfinkelI. (1973) “A skeptical note on ‘the optimality’ of wage subsidy programs.”Amer. Econ. Rev.63 (June): 447–453.
3.
HahnF. H. (1973) “On optimum taxation.”J. of Econ. Theory6 (February): 96–106.
4.
KesselmanJ. (1971) “Conditional subsidies in income maintenance.”Western Econ. J.9 (March): 1–20.
5.
LernerA. P. (1944) The Economics of Control: New York: MacMillan.
6.
MirrleesJ. A. (1971) “An exploration in the theory of optimum income taxation.”Rev. of Econ. Studies38 (April): 175–208.
7.
MusgraveR. A. (1959) The Theory of Public Finance. New York: McGraw-Hill.
8.
ZeckhauserR. (1971) “Optimal mechanism for income transfers.”Amer. Econ. Rev.61 (June): 324–334.
