Redistribution and labour supply

This paper explores the effect of personal income taxes on redistribution when labour supply reactions are taken into consideration. The results indicate that the classical non-behavioural results on redistribution are not necessarily satisfied in a more general behavioural framework. In this respect, it is shown that the relevant transition to measure redistribution is not the transition from the initial post-tax to the final post-tax income distribution, but rather from the more precise initial pre-tax to the final post-tax income distribution. In addition, the necessary and sufficient conditions to ensure redistribution in this wider setting are postulated, which helps determine the behavioural bias under alternative tax and labour supply models. This shows that the functional specification of labour supply may also affect the results.