samlet årgang - Økonomisk Institut - Københavns Universitet

348
Fixed
work
cost
Disposable income
45 0
Figure 8. Traditional redistribution policy.
NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
Earnings
pends on the size of elasticities along each margin of labor supply response (hours-ofwork
and participation elasticities), and on the size of tax rates along each margin
(marginal and participation tax rates). If effective marginal tax rates are initially high,
the increase in taxes creates large distortions along the intensive margin. For both policies,
this gives an unfavorable trade-off between equity and efficiency. By contrast, the
tax on labor force participation affects the impact of the two policies in opposite directions.
The presence of high participation tax rates makes the traditional welfare policy
more costly, whereas the working poor policy tends to become more desirable. The reason
is that the traditional policy reduces participation, while the working poor policy
stimulates it. In particular, the working poor policy will be attractive when participation
tax rates are high at the bottom of the earnings distribution, because this is where the
additional entry takes place.
In addition to elasticities and tax rates, the distribution of earnings in the population
will be important. For example, if the degree of earnings equality is already very high,
the gain from additional redistribution will be relatively low. To see this, recall that tax
and transfer payments for each individual are functions of earned income. If the income
distribution is strongly compressed, the taxes paid and the benefits received tend to be of
a relatively similar size for most individuals in the population. Hence, a reform that
increases tax rates and benefits generates relatively little redistribution per dollar of
deadweight burden, thereby creating an unfavorable equity-efficiency trade-off. Indeed,