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Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach

van Baalen, Brigitte ; Müller, Tobias

In: International Tax and Public Finance, 2014, vol. 21, no. 2, p. 198-227

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    Title
    • Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach
    Author
    • van Baalen, Brigitte. Swiss Federal Tax Administration, Schwarztorstrasse 50, 3003, Berne, Switzerland
    • Müller, Tobias. Department of Economics, University of Geneva, 40 boul. du Pont-d'Arve, 1211, Geneva 4, Switzerland
    Document Type
    • Postprint
    Language
    • English
    Published in
    • International Tax and Public Finance, 2014, vol. 21, no. 2, p. 198-227. Springer US; http://www.springer-ny.com
    Other Version
    OAI-PMH Identifier
    • oai:doc.rero.ch:325928
    Summary
    This paper analyzes the social welfare effects of tax-benefit reforms in a framework integrating endogenous labor supply and unemployment. We adopt an ordinal approach to social welfare comparisons by searching for "socially desirable” reforms that would improve social welfare for an entire class of social welfare functions. In the model, there is a discrete distribution of individuals' productivities and individuals are heterogeneous with respect to leisure preferences (or disability of work). Labor supply decisions are limited to the participation decision. Unemployment is modeled in a search and matching framework with individual wage bargaining. For the social welfare analysis, the model is calibrated for Switzerland. Starting from a situation with an unemployment benefit scheme, the introduction of in-work benefits is shown to be a "socially desirable” reform: it would be unanimously preferred to the current situation according to all social welfare functions based on the criteria of Pareto, anonymity, and the principle of transfers. This result holds for two different types of preference heterogeneity (leisure preferences or disability of work) and also for the case where job search effort cannot be monitored.