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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

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  1. Introduction
  2. The theory of labor supply
  3. Effects of the tax and benefit system on work effort: concrete cases
    1. Definition
    2. Consequences on welfare gains
    3. Labor supply responses
    4. Consequences on employment
    5. Consequences on poverty
  4. Conclusion
  5. Bibliography

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.

[...] By the theory of labor supply which use the substitution and income effects, it is not possible to know if an individual will have incentive to work or not. Figure 12.6 : The impact of personal income tax on individual labor supply[4]. The figure 12.6 illustrates the impact of a personal income tax on individual labor supply. For both of graphs, HW is the budget line before- tax and HWt is the budget line after-tax, which is below the first one. [...]


[...] In spite of researches, it leads us to conclude that tax or benefit systems have not a significant responsibility in the labor market. The disadvantage with the tax and benefit system is the fact if people prefer staying at home with their families; it means that the government will not have a lot of revenues from tax rate but still have to redistribute money through the benefit system. The Conservative and Liberal Democrats want to offer more to individuals than Labor Party by increasing the tax and benefit system[17]. Bibliography: C. R. McConell, S. [...]


[...] Employment Effects of the Working Families Tax Credit?, The Institute for Fiscal Studies, Briefing Note No 1st April 2000 HM Treasury, The Modernisation of Britain's Tax and Benefit System Number Two-Work Incentives: A report by Martin Taylor Brewer, M., Duncan, A., Shephard, A. and Suarez, M.J., (2003). Working Families' Tax Credit Work? Analysing the impact of in-work support on labor 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, [...]

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