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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4652.
Length: Date of creation: Feb 1994 Date of revision: Publication status: published as Journal of Public Economics, Vol. 58, no. 3 (1995): 365-390. Handle: RePEc:nbr:nberwo:4652
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Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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