Insurance, Redistribution, and the Inequality of Lifetime Income

Victoria Prowse, Daniel Kemptner () and Peter Hahn

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: In this paper, we study how the tax-and-transfer system reduces the inequality of lifetime income by redistributing lifetime earnings between individuals with different skill endowments and by providing individuals with insurance against lifetime earnings risk. Based on a dynamic life-cycle model, we find that redistribution through the tax-andtransfer system offsets around half of the inequality in lifetime earnings that is due to differences in skill endowments. At the same time, taxes and transfers mitigate around 60% of the inequality in lifetime earnings that is attributable to employment and health risk. Progressive taxation of annual earnings provides little insurance against lifetime earnings risk. The lifetime insurance effects of taxation may be improved by moving to a progressive tax on lifetime earnings. Similarly, the lifetime insurance and redistributive effects of social assistance may be improved by requiring wealthy individuals to repay any social assistance received when younger.

Keywords: Lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models. (search for similar items in EconPapers)
JEL-codes: D63 H23 I24 I38 J22 J31 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2017-12
New Economics Papers: this item is included in nep-ias, nep-lma and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Insurance, Redistribution, and the Inequality of Lifetime Income (2023)
Working Paper: Insurance, redistribution, and the inequality of lifetime income (2023)
Working Paper: Insurance, Redistribution, and the Inequality of Lifetime Income (2023)
Working Paper: Insurance, Redistribution, and the Inequality of Lifetime Income (2019)
Working Paper: Insurance, Redistribution, and the Inequality of Lifetime Income (2018)
Working Paper: Insurance, Redistribution, and the Inequality of Lifetime Income (2017)
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