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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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  • Alessandro Balestrino
  • Alessandro Cigno
  • Anna Pettini

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.

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  • Alessandro Balestrino & Alessandro Cigno & Anna Pettini, 2003. "Doing Wonders with an Egg: Optimal Re‐distribution When Households Differ in Market and Non‐Market Abilities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(3), pages 479-498, July.
    • Handle: RePEc:bla:jpbect:v:5:y:2003:i:3:p:479-498
    DOI: 10.1111/1467-9779.00144
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    1. Alessandro Cigno, 2011. "Agency in Family Policy: A Survey," CESifo Economic Studies, CESifo, vol. 57(2), pages 305-331, June.
    2. Henrik Jordahl & Luca Micheletto, 2005. "Optimal Utilitarian Taxation and Horizontal Equity," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(4), pages 681-708, October.
    3. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    4. Alessandro Balestrino & Alessandro Cigno & Anna Pettini, 2002. "Endogenous Fertility and the Design of Family Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(2), pages 175-193, March.
    5. Jorge Martinez-Vazquez & Violeta Vulovic & Yongzheng Liu, 2011. "Direct versus Indirect Taxation: Trends, Theory, and Economic Significance," Chapters, in: Emilio Albi & Jorge Martinez-Vazquez (ed.), The Elgar Guide to Tax Systems, chapter 2, Edward Elgar Publishing.
    6. Akira Yakita, 2017. "Fertility, Child Care Outside the Home and Pay-as-You-Go Social Security," Population Economics, in: Population Aging, Fertility and Social Security, chapter 0, pages 45-63, Springer.
    7. Alessandra Casarico & Luca Micheletto & Alessandro Sommacal, 2015. "Intergenerational transmission of skills during childhood and optimal public policy," Journal of Population Economics, Springer;European Society for Population Economics, vol. 28(2), pages 353-372, April.
    8. Kristin Dale, 2009. "Household skills and low wages," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(4), pages 1025-1038, October.
    9. Tomer Blumkin & Yoram Margalioth & Efraim Sadka, 2015. "The Re-distributive Role of Child Benefits Revisited," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 476-501, June.

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