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Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump‐Sum Redistribution

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  • Alan D. Viard

Abstract

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.

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  • Alan D. Viard, 2001. "Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump‐Sum Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 483-500, October.
    • Handle: RePEc:bla:jpbect:v:3:y:2001:i:4:p:483-500
    DOI: 10.1111/1097-3923.00080
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    Cited by:

    1. Slack, Sean & Ulph, David, 2014. "Optimal Universal and Categorical Benefits with Classification Errors and Imperfect Enforcement," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-13, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Geir H. M. Bjertnæs, 2018. "The marginal cost of public funds in large welfare state countries," Discussion Papers 879, Statistics Norway, Research Department.
    3. Parsons, Donald O., 2011. "Double-Sided Moral Hazard in Job Displacement Insurance Contracts," IZA Discussion Papers 6003, Institute of Labor Economics (IZA).
    4. Slack, Sean Edward, 2015. "Revisiting the optimal linear income tax with categorical transfers," Economics Letters, Elsevier, vol. 134(C), pages 73-77.
    5. David Ulph & Sean Slack, 2016. "Subjective Well-Being, Peer Comparisons and Optimal Income Taxation," Discussion Paper Series, School of Economics and Finance 201614, School of Economics and Finance, University of St Andrews, revised 23 Nov 2016.
    6. N. Gregory Mankiw & Matthew Weinzierl, 2010. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 155-176, February.
    7. Robin Boadway & Pierre Pestieau, 2006. "Tagging and redistributive taxation," Annals of Economics and Statistics, GENES, issue 83-84, pages 123-147.
    8. Spencer Bastani, 2013. "Gender-based and couple-based taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 653-686, August.
    9. Sean Slack & David Ulph, 2014. "Optimal Universal and Categorical Benefits with Classification Errors and Imperfect Enforcement," Discussion Paper Series, School of Economics and Finance 201411, School of Economics and Finance, University of St Andrews.
    10. Geir H. M. Bjertnæs, 2020. "The marginal (opportunity) cost of public funds," Discussion Papers 925, Statistics Norway, Research Department.
    11. Sören Blomquist & Luca Micheletto, 2008. "Age‐related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, March.
    12. Laurence Jacquet, 2014. "Tagging and redistributive taxation with imperfect disability monitoring," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(2), pages 403-435, February.
    13. Slack, Sean & Ulph, David, 2014. "Optimal Universal and Categorical Benefits with Classification Errors and Imperfect Enforcement," SIRE Discussion Papers 2015-13, Scottish Institute for Research in Economics (SIRE).
    14. OBARA, Takuya, 2016. "Differential Income Taxation and Tiebout Sorting," CCES Discussion Paper Series 64_v2, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    15. Donald O. Parsons, 2019. "The Simple Analytics Of Job Displacement Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(2), pages 351-380, June.
    16. Helmuth Cremer & Firouz Gahvari & Jean-Marie Lozachmeur, 2010. "Tagging and Income Taxation: Theory and an Application," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 31-50, February.
    17. Tayibov, Khayyam, 2024. "Tagging Birthplace for Optimal Tax Policy, Redistribution, and Welfare," Working Papers in Economics and Statistics 9/2024, Linnaeus University, School of Business and Economics, Department of Economics and Statistics.
    18. Geir Bjertnaes, 2015. "Social Security Transfers and the Marginal Cost of Public Funds," CESifo Working Paper Series 5689, CESifo.

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