Labor supply behavior and the design of tax and transfer policy

This paper has recent evidence on labor supply behavior - showing hours-of-work responses - has important implications for the design of tax and transfer policy. Based on a review of recent research in this field, we conclude the following: (i) conventional ways of evaluating the impact of tax-transfer reforms on economic efficiency have to be revised. Based on a review of recent research in this field, we conclude: (i) conventional ways of evaluating the impact of tax-transfer reform on economic efficiency have been revised. (ii) optimal redistributional policies may well involve negative marginal tax rates at the bottom of the earnings distribution. (Ii) optimal redistributional policies involved negative marginal tax rates to the bottom of the earnings distribution. (iii) the introduction of the Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansions of the credit during the past two decades did not involve a trade-off between efficiency and equality as suggested by previous estimates. (Iii) Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansion of the credit under decades did not involved a trade-off efficiency and equality as suggested by estimates. Instead, the EITC has improved both equality and efficiency. (iv) or most European countries, redistribution to the working poor involves a substantially lower trade-off between efficiency and equality than traditional redistributional policies targeted to those out of work. (Iv) redistributing to the working poor a substantially lower trade-off efficiency and equality in traditional redistributional policies targeted too out of work.