A Theory of the Welfare State
The welfare state can be seen as an insurance device that makes lifetime careers safer, increases risk taking and suffers from moral hazard effects. Adopting this view, the paper studies the trade-off between average income and inequality, evaluating redistributive equilibria from an allocative point of view. It examines the problem of optimal redistributive taxation with tax-induced risk taking and shows that constant returns to risk taking are likely to imply a paradox where more redistribution results in more post-tax inequality. In general, optimal taxation will imply either that the redistribution paradox is present or that the economy operates at a point of its efficiency frontier where more inequality implies a lower average income. Copyright 1995 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 97 (1995)
Issue (Month): 4 (December)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
- Levy, Haim, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, vol. 79(3), pages 597-600, June.
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"Optimal taxation in a stochastic economy : A Cobb-Douglas example,"
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- Sinn, Hans-Werner, 1989.
"Two-Moment Decision Models and Expected Utility Maximization: Comment,"
Munich Reprints in Economics
19848, University of Munich, Department of Economics.
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- J. E. Stiglitz, 1969.
"The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking,"
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Oxford University Press, vol. 83(2), pages 263-283.
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- Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277.
- Jonathan Eaton & Harvey S. Rosen, 1979.
"Taxation, Human Capital and Uncertainty,"
497, Princeton University, Department of Economics, Industrial Relations Section..
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