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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
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Publication status: published as Journal of Public Economics, Vol. 58, no. 3 (1995): 365-390.
Handle: RePEc:nbr:nberwo:4652
Note: PE
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  8. J. Bhagwati & T. N. Srinivasan, 1979. "Revenue-Seeking: A Generalization of the Theory of Tariffs," Working papers 243, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Karla Hoff & Andrew B. Lyon, 1994. "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," NBER Working Papers 4652, National Bureau of Economic Research, Inc.
  10. David Card, 1993. "Using Geographic Variation in College Proximity to Estimate the Return to Schooling," Working Papers 696, Princeton University, Department of Economics, Industrial Relations Section..
  11. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
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  14. William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," UCLA Economics Working Papers 554, UCLA Department of Economics.
  15. 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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  18. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  19. Hoff, Karla, 1991. "Land Taxes, Output Taxes, and Sharecropping: Was Henry George Right?," World Bank Economic Review, World Bank Group, vol. 5(1), pages 93-111, January.
  20. Browning, Edgar K & Johnson, William R, 1984. "The Trade-Off between Equality and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 175-203, April.
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  25. Taubman, Paul, 1989. "Role of Parental Income in Educational Attainment," American Economic Review, American Economic Association, vol. 79(2), pages 57-61, May.
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