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. [...]
[...] Impact of Tax and Benefit Changes Between April 2000 and April 2003 on Parents' Labor Supply”, The Institute of Fiscal Studies, Briefing Note No 4th Feb 2005. Corden and Craig, Perceptions of Family Credit, SPRU Blundell, R. (2000). “Work Incentives and ‘In-work' Benefit Reforms: A Review”, Oxford Review of Economic Policy, Vol.16, No Dictionary Thesaurus: http://www.indiainfoline.com/bisc/acct.html HM Treasury, The Modernisation of Britain's Tax and Benefit System Number Two-Work Incentives: A report by Martin Taylor C. R. McConell, S. L. Brue, D. [...]
[...] According to the labor 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. Criticisms: in order to have the same level of income, the individual can work less if the government provides tax or benefit allowances; it is called the income effect. An example: When the tax increases, the net wage decreases and according to a study, adult males work more. [...]
[...] According to Martin Taylor, the unemployment and poverty traps is the logical effect of the benefit system that gives financial helps to individuals from low incomes. It is difficult to have in the same time incentive and support. Consequences on employment The benefit system plays a positive role in the reducing of unemployment trap. Nevertheless moving from unemployment is sometimes hesitated by people who do not really know what the benefit system is. They fear about the uncertainties of the future and the future outcomes. [...]
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