Responsibility and Reward

A basic premise of optimal tax theory is that information about individuals' productivity and time worked is unobservable and does not enter into the government's objective function. In this paper, we explore the implications of a framework where earning capacity both plays an intrinsic and an instrumental role. In particular we analyze how a redistributive mechanism should be designed so as to hold people responsible for their work effort, while at the same time compensate for differences in pre-tax productivity.