Equality of Opportunity vs Equality of Outcomes: A Theory of Optimal Predistribution

• In Event: Social Objectives in Optimal Taxation

Abstract

This paper characterizes optimal policy in a setting where earnings depend on effort choices and skill, both of which can respond to policy. The government can influence the earnings distribution using taxes (redistribution) and the skill distribution using an “opportunity instrument” such as early childhood education (predistribution). The social objective allows for equality-of-opportunity preferences that distinguish between earnings differences from family background and preferences for work. The optimal tax schedule follows a generalized Mirrlees-Diamond rule, and the optimal education schedule follows a generalized Samuelson rule, with both rules accounting for the interaction between progressive taxes and education investments. The trade-off between equalizing outcomes (using taxes) and equalizing opportunities (using education) depends on the elasticity of earnings with respect to taxes, the returns to early education investments, and the relative importance of preferences and family background in driving earnings inequality. The analysis illustrates that predistribution can be motivated by efficiency (given the deviations from the Atkison-Stiglitz benchmark) and targeting reasons.

Coauthors: Raj Chetty, Henrik Kleven, Danny Yagan

Authors

• Henrik Kleven, Princeton University

• Damian Vergara, damiv@umich.edu

• Danny Yagan