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Abstract
AbstractWe develop a theory of optimal income and education taxation under asymmetric information between firms and workers. Our results show that a max–min optimal tax code can achieve predistribution by pooling wages across ability levels, conditional on income. We identify conditions under which the optimal solution leads to pooling or separating equilibria, highlighting bidirectional incentive constraints. Implementation requires nonlinear income taxes coupled with education subsidies or mandates. Predistribution is only feasible when income taxes are complemented by policies that restrict signaling opportunities. Our framework provides new insights into reducing wage inequality through optimal tax policy and labor market information management.
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