Arbetsrapport, Institutet för Framtidsstudier - Institute for Futures Studies
Sören Blomquist and Vidar Christiansen
Welfare Enhancing Marginal Tax Rates: The Case of Publicly Provided Day Care
Abstract: There is a well established case for public provision of
certain private goods when the government pursues income redistribution
under asymmetric information about the skill levels of the agents of the
economy. This paper higlights the role of tax funding of day care for
children, which is a striking example of a valid case for public provision.
We demonstrate that the optimal income tax should face alla agents with the
(social) cost of the day care they need in order to earn futher income. In
this sense day care should not be subsidised. It is simply paid for via the
tax bill. However, such a payment scheme, rather than a day care fee, is
crucial for alleviating the self-selection constraint of the asymmetric
information, non-linear income tax model, as it imposes a burden of paying
for superfluous day care on a mimicking high-skilled agent. Also, deviating
from conventional preference assumptions, we show that heterogeneity of
preferences for work and day care does not invalidate the Pareto improving
properties of this kind of public provision.
Keywords: Day care; Marginal income tax; Public provision; Private goods; In-kind transfer; Heterogeneous preferences; (follow links to similar papers)
JEL-Codes: H21; H42; I38; (follow links to similar papers)
23 pages, September 2004
ISSN 1652-120X ISBN 91-89655-55-9
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