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A Theory of the Welfare State

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  • Sinn, Hans-Werner

Abstract

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 studies 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 either imply 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.

Suggested Citation

  • Sinn, Hans-Werner, 1995. "A Theory of the Welfare State," CEPR Discussion Papers 1278, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1278
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    References listed on IDEAS

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    1. Sinn, Hans-Werner, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, vol. 79(3), pages 601-602, June.
    2. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-797, August.
    3. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-328, November.
    4. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-715, September.
    5. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434-434.
    6. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 263-283.
    7. Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 58(3), pages 388-422.
    8. Diamond, P. A. & Helms, L. J. & Mirrlees, J. A., 1980. "Optimal taxation in a stochastic economy : A Cobb-Douglas example," Journal of Public Economics, Elsevier, vol. 14(1), pages 1-29, August.
    9. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277-277.
    10. 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.
    11. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    12. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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    More about this item

    Keywords

    Redistribution; Welfare State;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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