Charles Blackorby and Paul Beaudry
Abstract
This paper characterizes an optimal redistribution program when taxation authorities: (1) are uninformed about individuals’ value of time in both market and non-market activities, (2) can observe both market-income and time allocated to market employment, and (3) are utilitarian. Formally, the problem is a special case of a multidimensional screening problem with two dimensions of unobserved attributes. In contrast to much of the optimal income taxation literature, we show that optimal redistribution in this environment involves distorting market employment upwards for low net-income individuals ( through negative marginal income taxes or employment subsidies) and distorting employment downward for high net-income individuals (through positive marginal income taxes). It is also shown that workfare should be used as a means of redistributing income only as a last recourse.