The Efficiency of Race- and Gender-Targeted Income Transfers

Abstract

In this article, the authors quantify the potential efficiency gains from moving toward an income redistribution system that bases transfers on membership in demographic groups such as race and gender. They compute four measures of the marginal efficiency cost (MEC) of redistribution under a standard linear income tax and under a policy that tags specific demographic groups. The authors find that a tagging system can significantly lower the MEC of redistribution. At the margin, a system of tagging demographic groups achieves the goal of greater income equality at a significantly lower cost in terms of lost output.