Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs

Karla Hoff and Andrew Lyon

No 4652, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economists have generally argued that income redistribution comes at a cost in aggregate incomes. We provide a counter-example in a model where private information gives rise to incentive constraints. In the model, a wage tax creates the usual distortion in labor-leisure choices, but the grants that it finances reduce a distortion in investment in human capital. We prove that simple redistributive policies can yield Pareto improvements and increase aggregate incomes. Where higher education is beyond the reach of the poor, the wage tax- transfer policy is under most circumstances more effective than targeted credit taxes or subsidies in increasing over-all efficiency.

JEL-codes: D82 H21 (search for similar items in EconPapers)
Date: 1994-02
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published as Journal of Public Economics, Vol. 58, no. 3 (1995): 365-390.

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Journal Article: Non-leaky buckets: Optimal redistributive taxation and agency costs (1995)
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