Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach

2020 ◽  
Vol 12 (1) ◽  
pp. 254-292 ◽  
Author(s):  
Kory Kroft ◽  
Kavan Kucko ◽  
Etienne Lehmann ◽  
Johannes Schmieder
Keyword(s):  
Income Tax ◽  
The United States ◽  
Income Taxation ◽  
Optimal Income Taxation ◽  
Sufficient Statistics ◽  
Earned Income ◽  
Tax Progressivity ◽  
Negative Income ◽  
Policy Variation ◽  
Negative Income Tax

We derive a sufficient statistics tax formula in a model that incorporates unemployment and endogenous wages to study the shape of the optimal income tax. Key sufficient statistics are the macro employment response to taxation, the micro and macro participation response to taxation, and the wage-moderating effect of tax progressivity. We empirically implement the tax formula by estimating the micro and macro elasticities using policy variation from the United States. Our results suggest that the optimal tax more closely resembles a negative income tax than an earned income tax credit relative to the case where unemployment and wage responses are ignored. (JEL E24, H21, H23, H24, H31, J22, J31)

scholarly journals The Negative Income Tax and the Evolution of U.S. Welfare Policy

2003 ◽  
Vol 17 (3) ◽  
pp. 119-140 ◽  
Author(s):  
Robert A Moffitt
Keyword(s):  
Income Tax ◽  
Welfare Policy ◽  
The Other ◽  
Work Requirements ◽  
Work Requirement ◽  
Earned Income ◽  
Academic Literature ◽  
Milton Friedman ◽  
Negative Income ◽  
Negative Income Tax

The negative income tax proposed by Milton Friedman represents one of the fundamental ideas of modern welfare policy. However, the academic literature has raised two difficulties with it, one challenging its purported work incentives and the other suggesting the possible superiority of work requirements. In addition, work requirement approaches have gained ground in actual U.S. welfare policy over the last 30 years and the number of different programs has proliferated, another development counter to the negative income tax. On the other hand, the Earned Income Tax Credit has produced a negative-income-tax-like program on a vast scale.

Negative Income Tax Comes to Britain, 1955–1970

2019 ◽  
pp. 95-124
Author(s):  
Peter Sloman
Keyword(s):  
Income Tax ◽  
The United States ◽  
Cultural Resistance ◽  
Means Testing ◽  
Negative Income ◽  
Working Families ◽  
1960S And 1970S ◽  
The 1960S ◽  
Families With Children ◽  
Negative Income Tax

The 1960s witnessed a revival of concern about poverty on both sides of the Atlantic. One of the most fashionable responses to this ‘rediscovery of poverty’ in the United States was the concept of a Negative Income Tax, which Milton Friedman popularized in Capitalism and Freedom (1962). Much of the literature on the US guaranteed income debate presents NIT as a distinctively American phenomenon, but the possibility of integrating tax and benefits in this way was also central to British social policy during the 1960s and 1970s. Both Conservative and Labour governments hoped that NIT could allow them to target benefits on the poor without the stigma of conventional means-testing—focusing first on pensioners, then on working families with children. The idea attracted wide attention inside and outside government, but ran up against both cultural resistance to wage supplements and technical difficulties in paying benefits through the PAYE system.

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