Discuss the disincentives on work effort induced by the tax and benefit system, and how the theory of labor supply offers alternative systems to minimize these disincentives

Résumé du document

In the UK, USA or in France, Government is seen from different angles. A State has duties and functions. In order to look after the welfare of their citizens, it tries to improve the reputation through taxation and benefit system. The main problem for most countries is the unemployment. Few countries give advantage to citizens who work, i.e. it give money by compensating the loss of leisure. In this paper, I shall try to discuss about the disincentives on work effort induced by the tax and the benefit system, and how the theory of labor supplies offers alternative systems to minimize these disincentives. The tax and benefit system are specific for each country but the needs are different. Is the tax system better than the benefit system in terms of improving work effort? How can individuals choose between work and unemployment? What can be the advantages to stay at home? Do the tax and benefit system have an important place in the incentives on work effort? Why individuals put effort to work if they have the choice to stay at home and get benefit system? First of all, the introduction of the theory of labor supply would help us to understand the behavior of individuals, and their incentive to decide if they want to work. Afterwards it would be logical to check if the theory could be realistic.

Extraits

[...] That is the reason it has to be a rise of the wage that will compensate the loss of leisure time. It is called the substitution effect, which is used to determinate the welfare of people and their gains. Thus the welfare loss by the taxation is compensated by the gain of income. In the basic model, the reservation wage has an important place. It influences people to move from their previous job to the new one if the wage after-tax is better or not. The wage effect on participation, in particular in the group of women, reflects the elasticity. [...]

[...] Theoretically, the incentive to spend time in leisure is explained by the domination of the substitution effect on the income effect. If it is the case, the individual works less. On the contrary, when the income effect prevails over the substitution effect, the individual prefers working than having more leisure. According to the labour supply theory, it is right to say that the cut of wages implies an income effect that increases hours of work and a substitution effect that decreases hours of work. [...]

[...] Analysing the impact of in-work support on labour supply and programme participation”, Inland Revenue Working Paper 2. Blundell, R. (2000). “Work Incentives and ‘In-work' Benefit Reforms: A Review”, Oxford Review of Economic Policy, Vol.16, No Blundell, R. (2000). “Work Incentives and ‘In-work' Benefit Reforms: A Review”, Oxford Review of Economic Policy, Vol.16, No Blundell, R., Brewer, M. & Shephard, A., (2004). Impact of Tax and Benefit Changes Between April 2000 and April 2003 on Parents' Labour Supply”, The Institute of Fiscal Studies, Briefing Note No 4th Feb 2005. [...]

[...] and Suarez, M.J., (2003). Working Families' Tax Credit Work? Analysing the impact of in-work support on labour supply and programme participation”, Inland Revenue Working Paper 2. Brewer, M., Stuart, A., (2005). “Proposed Tax and Benefit Changes Winners and losers in the next The Institute of Fiscal Studies, Election briefing, No Blundell, R. and Reed, H., (2000). Employment Effects of the Working Families Tax Credit”, The Institute for Fiscal Studies, Briefing Note No 1st April 2000 Blundell, R., Brewer, M. & Shephard, A., (2004). [...]

[...] First of all, the introduction of the theory of labour supply would help us to understand the behaviour of individuals, and their incentive to decide if they want to work. Afterwards it would be logical to check if the theory could be realistic The theory of labour supply It is interesting to know how an individual decides to work and for how many hours. That is the starting point to understand what are the incentives for an individual to work. [...]