Taxes and employment subsidies in optimal redistribution programs

This paper explores how to optimally set tax and transfers when taxation authorities: (1) are uninformed about individuals ’ value of time in both market and non-market activi-ties and (2) can observe both market-income and time allocated to market employment. In contrast to much of the optimal income taxation literature, we show that optimal redistribu-tion in this environment involves distorting market employment upwards for low net-income individuals through phased-out wage-contingent employment subsidies, and distorting em-ployment downward for high net-income individuals through positive and increasing marginal income tax rate. We also show that workfare may also be used as part of an optimal redis-tribution program