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The tradeoff between growth and redistribution: ELIE in an overlapping generations model

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  • de la CROIX, David

    ()
    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • LUBRANO, Michel

Abstract

The ELIE scheme of Kolm taxes labour capacities instead of labour income in order to circumvent the distortionary effect of taxation on labour supply. Still, Kolm does not study the impact of ELIE on human capital formation and investment. In this paper, we build an overlapping generations (OLG) model with heterogenous agents and endogenous growth driven by investment in human capital. We study the effect of ELIE on education investment and other aggregate economic variables. Calibrating the model to French data, we highlight a tradeoff between growth and redistribution. With a perfect credit market, ELIE is successful in reducing inequalities and poverty, but it is at the expense of lower investment in education and slower growth. In an economy with an imperfect credit market where individuals cannot borrow to educate, the tradeoff between growth and redistribution is not overturned but is less severe. However, it is possible to overturn completely that trade-off simply by changing the base of taxation for the young generation which is equivalent to subsidising education.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2009018.

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Date of creation: 01 Mar 2009
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Handle: RePEc:cor:louvco:2009018

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Keywords: education; growth; redistribution; Kolm;

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  1. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  2. Cecilia Garcia-Penalosa & Stephen Turnovsky, . "Growth, Income Inequality, and Fiscal Policy: What are the Relevant Tradeoffs?," Working Papers UWEC-2006-27-P, University of Washington, Department of Economics.
  3. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  4. Maddison, Angus, 2007. "Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History," OUP Catalogue, Oxford University Press, number 9780199227204, October.
  5. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, number 9780521017039.
  6. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-73, June.
  7. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151.
  8. De Gregorio, Jose & Kim, Se-Jik, 2000. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 579-607, August.
  9. Michel Lubrano, 2008. "The Redistributive Aspects of ELIE: a simulationapproach," Working Papers halshs-00347278, HAL.
  10. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  11. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
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  1. Fair labor income tax and human capital accumulation
    by Economic Logician in Economic Logic on 2009-09-29 14:30:00

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