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Doing Wonders with an Egg: Optimal Re-distribution When Households Differ in Market and Non-Market Abilities

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Author Info
Alessandro Balestrino (University of Pisa and ChilD)
Alessandro Cigno
Anna Pettini

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Abstract

The paper studies non-linear income taxation and linear commodity taxation in a household production context with households differentiated by market and non-market ability. In such a setting, there is an efficiency motive for re-distribution which is independent from the usual equity motive, and operates also when the social planner is indifferent to utility inequality. As a consequence, some of the policy prescriptions applicable to the case in which households differ in market ability only do not hold when households differ also in non-market ability. For instance, re-distribution is not necessarily from high- to low-wage households, and it is not necessarily true that the marginal rate of income tax should be zero for high incomes and positive for low incomes. In some cases, re-distribution may accentuate rather than lessen utility inequality, and can reverse the direction of income inequality relative to the laissez-faire equilibrium. Furthermore, contrary to Atkinson-Stiglitz, it may be optimal to use indirect and direct taxation simultaneously even when the utility function is separable in commodities and labour. Copyright 2003 Blackwell Publishing Inc..

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 5 (2003)
Issue (Month): 3 (07)
Pages: 479-498
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Handle: RePEc:bla:jpbect:v:5:y:2003:i:3:p:479-498

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  1. Makoto Hirazawa & Akira Yakita, 2009. "Fertility, child care outside the home, and pay-as-you-go social security," Journal of Population Economics, Springer, vol. 22(3), pages 565-583, July. [Downloadable!] (restricted)
  2. Kristin Dale, 2009. "Household skills and low wages," Journal of Population Economics, Springer, vol. 22(4), pages 1025-1038, October. [Downloadable!] (restricted)
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