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Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump‐Sum Redistribution
Author(s) -
Viard Alan D.
Publication year - 2001
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/1097-3923.00080
Subject(s) - economics , redistribution (election) , categorical variable , welfare , transfer payment , inequality , payment , lump sum , planner , microeconomics , public economics , labour economics , econometrics , mathematics , statistics , finance , mathematical analysis , politics , political science , computer science , law , market economy , programming language
Despite their importance in tax‐transfer systems, categorical transfer payments, based on (nearly) exogenous characteristics such as disability or date of birth, have been deemphasized in optimal‐tax analysis. I use the well‐developed theory of first‐best redistribution to clarify the welfare economics of categorical transfers, which are a form of limited lump‐sum redistribution. The comparison to first‐best redistribution explains how categorical transfers affect groups' labor supplies and utility levels, why the use of categorical transfers is inversely related to the planner's inequality aversion, and why their use reduces the optimal income tax rate.