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Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs

  • Karla Hoff
  • Andrew B. Lyon

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4652.

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Date of creation: Feb 1994
Publication status: published as Journal of Public Economics, Vol. 58, no. 3 (1995): 365-390.
Handle: RePEc:nbr:nberwo:4652
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  11. Hoff, Karla & Lyon, Andrew B., 1995. "Non-leaky buckets: Optimal redistributive taxation and agency costs," Journal of Public Economics, Elsevier, vol. 58(3), pages 365-390, November.
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  14. Hoff, Karla, 1994. "The second theorem of the second best," Journal of Public Economics, Elsevier, vol. 54(2), pages 223-242, June.
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  19. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
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