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The Timing of Redistribution

Author

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  • Gerhard Glomm

    (Department of Economics, Wylie Hall, Indiana University, Bloomington, IN 47405, USA;)

  • Juergen Jung

    (Department of Economics, Towson University, 8000 York Road, Towson, MD 21252, USA; corresponding author.)

Abstract

We investigate whether late redistribution programs that can be targeted toward low income families, but that may distort savings decisions, can “dominate” early redistribution programs that cannot be targeted as a result of information constraints. We use simple two-period overlapping generations models with heterogeneous agents under six policy regimes: a model calibrated to the U.S. economy (benchmark), two early redistribution (lump sum) regimes, two (targeted) late redistribution regimes, and finally a model without taxes and redistribution. Redistribution programs are financed by a labor tax on the young generation and a capital tax on the old generation. We argue that if the programs are small in size, late redistribution can dominate early redistribution in terms of welfare but not in terms of real output. Better targeting of low income households cannot completely offset savings distortions. In addition, we find that the optimal transfer and tax policy implies a capital tax of 100% and transfers exclusively to the young generation.

Suggested Citation

  • Gerhard Glomm & Juergen Jung, 2013. "The Timing of Redistribution," Southern Economic Journal, Southern Economic Association, vol. 80(1), pages 50-80, July.
  • Handle: RePEc:sej:ancoec:v:80:1:y:2013:p:50-80
    DOI: 10.4284/0038-4038-2011.071
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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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