Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2024:8: Optimal redistribution and education signaling

Spencer Bastani (), Tomer Blumkin () and Luca Micheletto ()
Additional contact information
Spencer Bastani: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden
Tomer Blumkin: Department of Economics, Ben Gurion University of the Negev
Luca Micheletto: Department of Law, University of Milan, and Dondena Centre for Research on Social Dynamics and Public Policy, Bocconi University

Abstract: This paper studies optimal taxation of income and education when employers cannot observe workers’ productivity and workers signal their productivity to firms by choosing both quantity and quality of education. We characterize constrained efficient allocations and derive conditions under which there is predistribution, i.e., redistribution through wage compression. Implementation through income and education dependent taxes is discussed, as well as education mandates. A key insight is that achieving predistribution requires complementing the income tax with additional policy instruments that regulate the flow of information in the labor market and prevent high skilled individuals from separating themselves from their low-skilled counterparts.

Keywords: nonlinear taxation; education; asymmetric information; human capital; predistribution

JEL-codes: D82; H21; H52; J31

Language: English

91 pages, March 13, 2024

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