The size of government has increased dramatically over the last century. Given the magnitude of government involvement in the economy and the potential influence it has on individuals as well as the economy, studies documenting the effects of government size may offer particularly timely insights. This thesis addresses some of these issues. Chapter two and three deal with welfare reform.
Welfare systems are currently under criticism worldwide.
Many of these reforms aim to provide incentives for welfare recipients to join the work force, something often currently lacking. The second chapter estimates effective marginal tax rates for earned and unearned income over the entire income distribution in the U.S., defined as the change in net payments to government from all taxes and means-tested welfare programs resulting from a unit rise in income. Estimated marginal tax rates are very high for low-income households, which suggests that concerns about the disincentive effects of current welfare system are well founded. Chapter three subsequently develops a model that derives bounds on the optimal benefit-reduction rate, that is the rate at which welfare recipients lose welfare when their income increases by a unit. Specifically, the optimal income taxation model is augmented with the benefit-reduction rate.