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Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure

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  • Holter, Hans A

    ()
    (Department of Economics)

Abstract

I document a strong negative cross-country correlation between intergenerational earnings persistence and tax progressivity, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features, progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the US changes as I introduce tax- and eduction expenditure policies from other countries. I find that individual investments in human capital accounts for 62% of the estimated intergenerational earnings persistence in the US. Taxation, through its impact on investments in human capital, can explain 25% of the difference between the US and 10 other countries, whereas borrowing constraints have a limited impact on earnings persistence.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2011:21.

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Length: 56 pages
Date of creation: 31 Dec 2011
Date of revision:
Handle: RePEc:hhs:uunewp:2011_021

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Intergenerational Earnings Persistence; Taxation; Public Education Expenditure;

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  1. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-54, December.
  2. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
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Cited by:
  1. Dirk Krueger & Alexander Ludwig, 2013. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," PIER Working Paper Archive 13-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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