NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs

Karla Hoff, Andrew B. Lyon

NBER Working Paper No. 4652
Issued in February 1994
NBER Program(s):   PE

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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Document Object Identifier (DOI): 10.3386/w4652

Published: Journal of Public Economics, Vol. 58, no. 3 (1995): 365-390. citation courtesy of

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