Insurance, Redistribution, and the Inequality of Lifetime Income

53 Pages Posted: 29 Jan 2018

See all articles by Peter Haan

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Daniel Kemptner

German Institute for Economic Research (DIW Berlin)

Victoria L. Prowse

Purdue University - Department of Economics; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

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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-and -transfer 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

JEL Classification: D63, H23, I24, I38, J22, J31

Suggested Citation

Haan, Peter and Kemptner, Daniel and Prowse, Victoria L., Insurance, Redistribution, and the Inequality of Lifetime Income. IZA Discussion Paper No. 11275, Available at SSRN: https://ssrn.com/abstract=3111148 or http://dx.doi.org/10.2139/ssrn.3111148

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstraße 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Daniel Kemptner

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Victoria L. Prowse

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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