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Fiscal policy, composition of intergenerational transfers, and income distribution

  • Jaime Alonso-Carrera
  • Jordi Caballé
  • Xavier Raurich

In this paper, we characterize the relationship between the initial distribution of human capital and physical inheritances among individuals and the long-run distri- bution of these two variables. In a model with indivisible investment in education, we analyze how the initial distribution of income determines the posterior intergen- erational mobility in human capital and the evolution of intragenerational income inequality. This analysis enables us in turn to characterize the effects of fiscal policy on future income distribution and mobility when the composition of inter- generational transfers is endogenous. We find that a tax on inheritance results in both less intergenerational mobility and smaller investment in human capital. However, a tax on labor income may promote human capital accumulation if the education premium is sufficiently high.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-09.

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Length: 32 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-09
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