Abstract
This paper considers the question of whether it is possible to identify labour supply incentive effects of a tax and transfer system using information on only the distribution of earnings. The major characteristics of earnings distributions arising from a simple labour supply model are examined. These characteristics include the existence of modes and antimodes caused by kinks where effective marginal tax rates increase and non‐convexities in budget constraints arising from means‐testing. Actual earnings distributions, concentrating on unemployment benefit recipients, are then examined. It is suggested that the use of such an approach must be severely limited, in view of the fact that there is no one‐to‐one correspondence between the form of the earnings distribution and the parameters of a tax and transfer system.
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