Optimal tax-transfer systems and redistributive policy

In this paper we develop "optimal yardsticks" to gauge the effectiveness of given tax and benefit policies in reducing inequality. We show that the co njunction of the optimal tax and optimal benefits policies constitutes the optimal tax-and-benefit policy, given the tax and benefit budget sizes. A d ecomposition formula enables trends in the inequality impact of taxes and b enefits to be explained in terms of changing policy effectivess (targeting) and budget size effects. The analysis incorporates a distributional judgem ent parameter, for sensitivity analysis, and concludes with an examination of the Finnish case for the period 1971-1990.