Redistribution and labour supply incentives: A simple application of the optimal tax theory

A growing concern appeared in many developed countries during the last ten years that generous redistribution systems might be detrimental to those they want to help. By guaranteeing a minimum income or an income supplement to those whose purchasing power would fall below some limit, these systems would be responsible for strong labour-supply disincentives, the cost of which may be very high, in a static framework and under alternative specifications of the labour supply elasticities and the social welfare function, we show, in this paper, that, even if such a mechanism is not in complete disagreement with the Mirrlees optimal tax model, the difference between optimal and real tau rates can be high. The proposed implementation of the optimal tau model can be considered as an original alternative to the standard econometric approach to the analysis of fiscal reforms.