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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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References

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  1. Roland Benabou & Efe A. Ok, 2001. "Mobility as Progressivity: Ranking Income Processes According to Equality of Opportunity," NBER Working Papers 8431, National Bureau of Economic Research, Inc.
  2. Salas, Rafael & Rabadan, Isabel, 1998. "Lifetime and Vertical Intertemporal Inequality, Income Smoothing, and Redistribution: A Social Welfare Approach," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 44(1), pages 63-79, March.
  3. Jakobsson, Ulf, 1976. "On the measurement of the degree of progression," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 161-168.
  4. Jarvis, Sarah & Jenkins, Stephen P, 1998. "How Much Income Mobility Is There in Britain?," Economic Journal, Royal Economic Society, vol. 108(447), pages 428-43, March.
  5. Paul Makdissi & Quentin Wodon, 2003. "Risk-adjusted measures of wage inequality and safety nets," Economics Bulletin, AccessEcon, vol. 9(1), pages 1-10.
  6. Michael Beenstock, 2004. "Rank And Quantity Mobility In The Empirical Dynamics Of Inequality," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(4), pages 519-541, December.
  7. repec:ebl:ecbull:v:9:y:2003:i:1:p:1-10 is not listed on IDEAS
  8. 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.
  9. Dardanoni Valentino, 1993. "Measuring Social Mobility," Journal of Economic Theory, Elsevier, vol. 61(2), pages 372-394, December.
  10. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  11. Gary Fields, 2010. "Does income mobility equalize longer-term incomes? New measures of an old concept," Journal of Economic Inequality, Springer, vol. 8(4), pages 409-427, December.
  12. Mark M. Trede, 1998. "The age profile of mobility measures: an application to earnings in West Germany," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(4), pages 397-409.
  13. N. Anders Klevmarken, 2004. "On The Wealth Dynamics Of Swedish Families, 1984-98," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(4), pages 469-491, December.
  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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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Mobility, Taxation and Welfare
    by maximorossi in NEP-LTV blog on 2011-06-29 15:27:32

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