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The Tradeoff Between Growth and Redistribution: ELIE in an Overlapping Generations Model

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  • David De La Croix

    ()
    (CORE - Department of Economics - Université Catholique de Louvain)

  • Michel Lubrano

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

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 HAL in its series Working Papers with number halshs-00382513.

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Date of creation: 07 May 2009
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Handle: RePEc:hal:wpaper:halshs-00382513

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Keywords: Education; Growth; Redistribution; Kolm;

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  1. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521806428, October.
  2. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  3. 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.
  4. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  5. Cecilia García-Pe�Alosa & Stephen J. Turnovsky, 2007. "Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 369-394, 03.
  6. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, number 9780521017039, October.
  7. José De Gregorio & Se-Jik Kim, 1998. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," Documentos de Trabajo 42, Centro de Economía Aplicada, Universidad de Chile.
  8. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  9. Michel Lubrano, 2008. "The Redistributive Aspects of ELIE: a simulationapproach," Working Papers halshs-00347278, HAL.
  10. Maddison, Angus, 2007. "Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History," OUP Catalogue, Oxford University Press, number 9780199227204.
  11. 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.
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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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