The Effects of Income Mobility and Tax Persistence on Income Redistribution and Inequality

Marina Agranov and Thomas Palfrey

No 22759, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the effect of income mobility and the persistence of redistributive tax policy on the level of redistribution in democratic societies. An infinite-horizon theoretical model is developed, and the properties of the equilibrium tax rate and the degree of after-tax inequality are characterized. Mobility and stickiness of tax policy are both negatively related to the equilibrium tax rate. However, neither is sufficient by itself. Social mobility has no effect on equilibrium taxes if tax policy is voted on in every period, and tax persistence has no effect in the absence of social mobility. The two forces are complementary. Tax persistence leads to higher levels of post-tax inequality, for any amount of mobility. The effect of mobility on inequality is less clear-cut and depends on the degree of tax persistence. A laboratory experiment is conducted to test the main comparative static predictions of the theory, and the results are generally supportive.

JEL-codes: C92 D3 H2 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (6)

Published as Marina Agranov & Thomas R. Palfrey, 2020. "The Effects of Income Mobility and Tax Persistence on Income Redistribution and Inequality," European Economic Review, .

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