In-Kind versus Cash Transfers in the Presence of Distortionary Taxes

Firouz Gahvari

Economic Inquiry, 1995, vol. 33, issue 1, 45-53

Abstract: In-kind transfers can Pareto-dominate cash transfers as a means of income redistribution if in-kind transfers and leisure are Hicks substitutes and leisure is a normal good. The result holds when redistributive instruments also include a linear income tax. The paper proves that, if the poor receive more in-kind transfers (and the rich less) than what they would choose for themselves, then, compared to cash transfers, there will be a higher labor supply by the poor, a lower labor supply by the rich, and higher levels of aggregate pretax income and tax revenues. Copyright 1995 by Oxford University Press.

Date: 1995
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