Memorandum, Department of Economics, University of Oslo 2007,05
In the present paper we examine the economic incentives to work for persons receiving benefits in Norway. We take into account how the tax- and benefit systems interact. For a large part of the population social security transfers ensure that the income if not working is far from zero. These benefits are typically curtailed if a person works. By including this benefit loss in the tax measure we compute what we call “total” tax rates for all benefit claimants in Norway. We estimate that benefit receivers on average would gain about 70 000 NOK if working full-time instead of not working at all. The total tax rate is about 70 percent for full-time work. About 4 percent will be economically worse off if working full-time instead of not working at all. In addition we find that the tax reform intended to improve economic efficiency by cutting the highest marginal taxes, will worsen the economic incentives for benefit receivers if the lower top-rates are financed by higher taxes at lower incomes. Instead we indicate that reforms making the overall progressivity of the formal tax system stronger would improve the incentives to work for these groups.