Optimal Redistribution with Productive Social Services

Publicly-provided private goods are conventionally considered consumer goods. Departing from this perspective, we analyze the public provision of inputs that improve household productivity (e.g., education and childcare). In a two-class economy with distorting taxation, public provision is always welfare improving with respect to pure taxation, given that the public input directly affects household productivity. Moreover, the case for public provision strengthens as households' heterogeneity in input demand fades out, contrary to consolidated results in the literature. The features of optimal provision schemes depend on the nature of publicly provided input, namely, if it substitutes household productive capacity or just helps households to exploit it.