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Non-leaky buckets: Optimal redistributive taxation and agency costs

  • Hoff, Karla
  • Lyon, Andrew B.

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 58 (1995)
Issue (Month): 3 (November)
Pages: 365-390

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Handle: RePEc:eee:pubeco:v:58:y:1995:i:3:p:365-390
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  18. William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Working Papers 3024, National Bureau of Economic Research, Inc.
  19. Aaron S. Edlin, 1993. "Is College Financial Aid Equitable and Efficient?," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 143-158, Spring.
  20. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
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  22. Rudolph G. Penner, 1989. "Credit Rationing and Government Loan Programs: A Welfare Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 194-196.
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