Inter-Temporal Sustainability of Fiscal Redistribution: A Methodological Framework

The chapter develops a methodology to analyze the inter-temporal implications of "fiscal interventions" - i.e., taxes and transfers that are intended to produce changes in income distribution and/or protect the poor. These concern both fiscal sustainability and the distribution of wealth across generations. First, we use the income concepts developed by the CEQ project to define fiscal interventions and show what the sustainability conditions are for a given set of fiscal interventions. We also examine the role of depleting natural capital and the consequences of assuming that the contributions to social security are forced savings rather than a tax. Second, we investigate the relationship between fiscal sustainability, fiscal interventions, and income strata. Third, we address the demographic dimension and study the relationship between fiscal interventions and the cross-cohort distribution of income and wealth. The methodology utilizes the NTA (National Transfers Accounts) concepts to model the demographic transition. Finally, we extend the methodology to integrate strata distribution and the cohort distribution of income and wealth. The Annex presents Excel files with empirical evidence on fiscal sustainability.