Optimal Income Taxation of Lone Mothers: An Empirical Comparison of the UK and Germany

Abstract

Optimal tax rules are used to evaluate the optimality of taxation for lone mothers in Germany and Britain. The theoretical model is combined with elasticities derived from the structural estimation of lone mothers' labour supply. For both countries we do not find that in-work credits with marginal tax rates are optimal. However we show that when the government has a low taste for redistribution, out-of-work transfers and transfer for the working poor are very similar, implying very low marginal tax rates. Further, the current tax and transfer systems in both countries are shown to be optimal only if governments have a much higher welfare value for income received by the non-workers than the working poor. Copyright � Institute of Fiscal Studies. Journal compilation � Royal Economic Society 2009.

Revealed social preferences of Dutch political parties

“…Earlier literature with both intensive and extensive margins generally analyzed the discrete-choice model of Saez (2002) without income effects (e.g. Blundell et al, 2009;Bargain and Keane, 2010;Bourguignon and Spadaro, 2012;Bargain et al, 2014c). 7 Our simulations demonstrate that the political weights are primarily driven by the distribution of gross earnings and the tax-benefit schedules, and not by participation or income effects.…”

“…Several other papers also find that (for all households, for subgroups or for specific countries) social welfare weights need not be monotonically declining in income (e.g. Petersen, 2007;Blundell et al, 2009;Bargain and Keane, 2010;Bargain et al, 2014b,c;Lockwood, 2016). Third, all political parties soak the rich by setting the top rate of the income tax close to the revenue-maximizing rate.…”

“…6 Pioneering work has been done by Spadaro (2000, 2012), who recover the social welfare weights for the tax system of France. Subsequently, many studies have derived social welfare weights: Petersen (2007) for Denmark, Blundell et al (2009) for single mothers in Germany and the UK, Bargain and Keane (2010) for childless singles in Ireland and the UK over several decades, Bargain et al (2014b,c) for childless singles in 17 European countries and the US, Hendren (2014) for the US, Lockwood and Weinzierl (2016) for the US over the period 1979 for the US if individuals have present bias. Finally, Lorenz and Sachs (2016) use the inverse optimal-tax method to identify Pareto-improving tax reforms in Germany.…”

Accounting for labor demand effects in structural labor supply models

“…Furthermore, they crucially a¤ect the optimal design of tax systems (see, e.g., Saez (2001), Immervoll et al (2007) and Blundell et al (2009)). The elasticities are usually derived using some sort of (structural or reduced form) labor supply model (see, e.g., Aaberge et al (1995Aaberge et al ( , 1999Aaberge et al ( , 2000, Hoynes (1996), Eissa and Hoynes (2004) and Heim (2007Heim ( , 2009).…”

How to stimulate single mothers on welfare to find a job: evidence from a policy experiment

“…Then, we proceed by investigating the distinct effects of the earnings disregard and of job creation on top of the earnings disregard. Finally, as in Blundell et al (2009), we make a distinction between two types of treated single mothers depending on the age of their youngest child. Since the compulsory education requirement for children starts at the age of 5, we distinguish single mothers with the youngest child in the age category 0-4 years from those with the youngest child 5-11 years.…”