Bunching, Time Constraints, and Workfare

This paper explores the use of workfare as part of the optimal tax mix. When agents have preferences that are quasilinear in leisure, unproductive workfare is optimal only if an optimal nonlinear tax scheme in the absence of workfare would feature distortions at the bottom of the wage distribution. These distortions can arise from two sources: binding constraints on the maximum available time, and bunching. An example is presented to illustrate the computation of an optimal schedule with work requirements. Copyright 2005 Blackwell Publishing Inc..