Income redistribution

This chapter examines the question of income redistribution and the 'second-best' context in which redistribution is constrained by the fact that only (gross and net) income is observable, so that public authorities cannot distinguish between people working hard with low skill and people working little with a high wage rate. As one would like to redistribute from high-skilled individuals to low-skilled individuals, more or less independently of their preferences over leisure, failure to distinguish between them is a direct obstacle to achieving fairness. The chapter first considers allocation rules and social orderings, along with social ordering functions and fair income tax. It then turns to a discussion of unearned income as well as the correlation between skills and quality of life and between education and skills.