Incomplete information is a commitment device for time consistency problems. In the context of time consistent labor income taxation privacy can lead to a Pareto superior outcome and increases the effectiveness of public education as a second best policy.

Restrictions on work hours are more important in countries with a large welfare state. We show that this empirical observation is consistent with the strategic effects of such restrictions in a welfare state in the context of optimal direct taxation in the tradition of Mirrlees (1971). Our...