Optimal (P)Redistribution in the Presence of Signaling : A First Pass

We analyze optimal redistribution in the presence of labor market signaling where workers' innate productive abilities are neither observed by the government nor by prospective employers. The dual role of income taxation in redistributing income and affecting signaling incentives is analyzed, as well as the role of tax systems that supplement income taxation with direct taxes on the signals. We show how taxation can be used to achieve predistribution (i.e., redistribution through wage compression), and evaluate when this is feasible and socially desirable. Interpreting signaling in the context of educational attainment, we provide a novel justification for education taxes/subsidies