Abstract
This paper studies the role of social insurance as a redistributive mechanism in presence of an optimal (linear or general) income tax. It considers a second-best setting with two unobservable individual characteristics: ability, measured by the wage rate and risk, measured by the probability of incurring a loss. It shows that both tax progressivity and the optimal level of social insurance crucially depend on the correlation between ability and risk.
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This paper has been prepared for the IIPF 51 st Congress held in Lisbon, August 21–24, 1995. The authors are grateful to F. Gahvari, M. Lundholm, M. Marchand, J.-C. Rochet, P. Sørenson and the referees for their comments.
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Cremer, H., Pestieau, P. Redistributive taxation and social insurance. Int Tax Public Finan 3, 281–295 (1996). https://doi.org/10.1007/BF00418945
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DOI: https://doi.org/10.1007/BF00418945