Working Paper: NBER ID: w4652
Authors: Karla Hoff; Andrew B. Lyon
Abstract: 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.
Keywords: redistributive taxation; agency costs; Pareto improvements; human capital investment
JEL Codes: H23; I22; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implementation of wage tax-transfer policies (H31) | Pareto improvements (D61) |
| wage tax-transfer policies (F16) | net gain in expected income and utility (D11) |
| tax reduces labor supply (H31) | increases investment in human capital (J24) |
| redistribution (H23) | relaxes constraints leading to inefficiencies in investment in human capital (D29) |
| tax-transfer scheme (H87) | transforms future labor earnings into risk-free income (J17) |
| tax-transfer scheme (H87) | resolves moral hazard and adverse selection issues in credit markets (D82) |
| tax-transfer policies (H23) | increase in aggregate incomes (E25) |
| simple redistributive policies (H23) | outperform direct interventions in terms of efficiency (D61) |
| income gains for the poor (D31) | outweigh losses for the rich (D33) |