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Mobility, Taxation and Welfare

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  • Sami Bibi
  • Jean-Yves Duclos
  • Abdelkrim Araar

Abstract

Income mobility is often thought to equalize permanent incomes and thereby to improve social welfare. The welfare analysis of mobility often fails, however, to account for the cost of the variability of periodic incomes around permanent incomes. This paper assesses the net welfare benefit of mobility by assuming both a social aversion to inequality in permanent incomes and an individual aversion to variability in periodic incomes. The paper further investigates the combined (and comparative) impact of mobility and of the tax system (another presumed income equalizer) on the dynamics of income across time and on the inequality of income across individuals. Using panel data, we find that Canada’s tax system limits significantly the redistributive impact of mobility while also lowering considerably the cost of income variability. The permanent income equalizing effect of taxes can reach up to 23 percent of mean income at the higher values of inequality aversion that we use. Globally, the net social welfare effect of both mobility and taxation is (almost always) positive and substantial, often amounting to around 30 percent of mean income. For all choices of parameter values, the tax effect exceeds by far the net effect of mobility on inequality and social welfare.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1114.

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Date of creation: 2011
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Handle: RePEc:lvl:lacicr:1114

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Keywords: Mobility; social welfare; risk; income variability; inequality; permanent income;

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  1. Peter Gottschalk & Enrico Spolaore, 2000. "On the Evaluation of Economic Mobility," Boston College Working Papers in Economics 459, Boston College Department of Economics, revised 09 Apr 2001.
  2. Fields, Gary S. & Ok, Efe A., 1996. "The Meaning and Measurement of Income Mobility," Journal of Economic Theory, Elsevier, vol. 71(2), pages 349-377, November.
  3. Roland Bénabou & Efe A. Ok, 2000. "Mobility as Progressivity: Ranking Income Processes According to Equality of Opportunity," Working Papers 150, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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  10. Fellman, J, 1976. "The Effect of Transformations on Lorenz Curves," Econometrica, Econometric Society, vol. 44(4), pages 823-24, July.
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  14. Shorrocks, A F, 1976. "Income Mobility and the Markov Assumption," Economic Journal, Royal Economic Society, vol. 86(343), pages 566-78, September.
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  19. Dardanoni Valentino, 1993. "Measuring Social Mobility," Journal of Economic Theory, Elsevier, vol. 61(2), pages 372-394, December.
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  1. Mobility, Taxation and Welfare
    by maximorossi in NEP-LTV blog on 2011-06-29 15:27:32

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