Lost jobs, new jobs and optimal tax-transfer reforms

Abstract Automation and globalisation imply deep changes in the labour market. An important policy issue is whether and how the tax-transfer rules should be reformed to help coping with those changes. While the prevailing response has consisted of more sophisticated designs of mean-testing and targeting, we also witness an increasing interest in policies inspired by simplicity. Using a combination of behavioural microsimulation and numerical optimization, we look for a (social welfare) optimal tax-transfer rule within a flexible class where total household disposable income is a 4th-degree polynomial in total household taxable income plus a constant. We use a model of household labour supply that makes it possible to account for equilibrium constraints and evaluate the effects of changes of the labour demand scenario. Beside the (observed) Status quo scenario, we consider two alternative stylized cases: the “Jobless” scenario and the “Polarised” scenario. We simulate and compare the social welfare attained by the current tax-transfer rules under the three scenarios and the social welfare attained by the different polynomial optimal tax-transfer rules identified in each scenario. We present results using the 2015 EU-SILC data sets for France, Germany, Italy and Luxembourg. The polynomial optimal rules are social welfare superior to the current ones in all the countries and under all the scenarios and—with the exception of Luxembourg—are close to a Universal Basic Income (or a Negative Income Tax) plus a not-too progressive tax rule (close to a Flat Tax).