6 Conclusion
This paper has illustrated some of the complexities involved in modelling the incentive effects of taxes and transfers, using only basic diagrammatic methods of analysis. A wide range of labour supply responses are shown to result from highly nonlinear budget constraints. A tax or benefit change which improves the labour supply incentives for one group of workers, without making them worse off, may at the same time introduce disincentives facing another group of workers. Tax policy design inevitably involves difficult trade-offs between the desire to avoid labour supply disincentives and the desire to provide income support.
