Redistributive taxation and social insurance

This paper studies the role of social insurance as a redistributive mechanism in presence of an optimal (linear or general) income tax. It considers a second-best setting with two unobservable individual characteristics: ability, measured by the wage rate and risk, measured by the probability of incurring a loss. It shows that both tax progressivity and the optimal level of social insurance crucially depend on the correlation between ability and risk.This paper has been prepared for the IIPF 51 st Congress held in Lisbon, August 21–24, 1995. The authors are grateful to F. Gahvari, M. Lundholm, M. Marchand, J.-C. Rochet, P. Sørenson and the referees for their comments.