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Redistribution as Social Insurance and Capital Market Integration

  • Giampaolo Arachi
  • Massimo D'Antoni

    ()

In this paper we claim that enhanced economic integration can call for an increase in redistribution among workers. When individuals are risk averse and no human capital insurance is available, the share of workers who choose to invest in "specific" human capital will be inefficiently low. Redistribution among workers plays the role of the missing insurance market by making the investment in the specific skills more attractive. Capital market integration has two different effects. On the one hand it makes labour income taxation more distortionary, therefore reducing the optimal tax rate on labour. On the other hand, it increases the variance of specific labour wage and widens the scope for risk protection of specific human capital through the redistribution implemented by a labour income tax. We show that the insurance effect of redistribution can be stronger than the distortionary effect, so that the optimal tax rate on labour income can increase when capital markets become more integrated.

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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 11 (2004)
Issue (Month): 4 (08)
Pages: 531-547

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Handle: RePEc:kap:itaxpf:v:11:y:2004:i:4:p:531-547
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  1. Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 495-526, December.
  2. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
  3. GABSZEWICZ, Jean J. & VAN YPERSELE, Tanguy, 1994. "Social Protection and Political Competition," CORE Discussion Papers 1994057, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. David E. Wildasin, 2005. "Fiscal Competition," Working Papers 2005-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  5. Sinn, Hans-Werner, 1996. "Social Insurance, Incentives and Risk Taking," Munich Reprints in Economics 19834, University of Munich, Department of Economics.
  6. D'Antoni, Massimo & Pagano, Ugo, 2002. "National cultures and social protection as alternative insurance devices," Structural Change and Economic Dynamics, Elsevier, vol. 13(4), pages 367-386, December.
  7. Torben M. Andersen & Niels Haldrup & Jan Rose Sørensen, 2000. "Labour market implications of EU product market integration," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 105-134, 04.
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