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A Theory of the Welfare State

Hans-Werner Sinn
The Scandinavian Journal of Economics
Vol. 97, No. 4, The Future of the Welfare State (Dec., 1995), pp. 495-526
Published by: Wiley on behalf of The Scandinavian Journal of Economics
DOI: 10.2307/3440540
Stable URL: http://www.jstor.org/stable/3440540
Page Count: 32
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A Theory of the Welfare State
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Abstract

The welfare state can be seen as an insurance device that makes lifetime careers safer, increases risk taking and suffers from moral hazard effects. Adopting this view, the paper studies the trade-off between average income and inequality, evaluating redistributive equilibria from an allocative point of view. It examines the problem of optimal redistributive taxation with tax-induced risk taking and shows that constant returns to risk taking are likely to imply a paradox where more redistribution results in more post-tax inequality. In general, optimal taxation will imply either that the redistribution paradox is present or that the economy operates at a point of its efficiency frontier where more inequality implies a lower average income.

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