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Insurance, Redistribution, and the Inequality of Lifetime Income

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Listed:
  • Haan, Peter

    (DIW Berlin)

  • Kemptner, Daniel

    (DIW Berlin)

  • Prowse, Victoria

    (Purdue University)

Abstract

Individuals vary considerably in how much they earn during their lifetimes. We study how the tax-and-transfer system offsets inequalities in lifetime earnings, which would otherwise translate into differences in living standards. Based on a life-cycle model, we find that redistribution by taxes and transfers offsets 54% of the inequality in lifetime earnings that is due to heterogeneous skill endowments. Meanwhile, taxes and transfers insure 45% of lifetime earnings risk. Taxes would provide more insurance if based on lifetime instead of annual earnings. Requiring wealthy individuals to repay social assistance received when younger would strengthen the insurance and redistributive functions of social assistance.

Suggested Citation

  • Haan, Peter & Kemptner, Daniel & Prowse, Victoria, 2019. "Insurance, Redistribution, and the Inequality of Lifetime Income," Rationality and Competition Discussion Paper Series 188, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:188
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    Cited by:

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    2. Peter Levell & Barra Roantree & Jonathan Shaw, 2021. "Mobility and the lifetime distributional impact of tax and transfer reforms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 751-793, August.
    3. Bartels, Charlotte & Neumann, Dirk, 2021. "Redistribution and Insurance in Welfare States around the World," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 123(4), pages 1116-1158.
    4. Fischer, Benjamin & Hügle, Dominik, 2020. "The private and fiscal returns to higher education: A simulation approach for a young German cohort," Discussion Papers 2020/21, Free University Berlin, School of Business & Economics.
    5. Korfhage, T.;, 2019. "Long-run consequences of informal elderly care and implications of public long-term care insurance," Health, Econometrics and Data Group (HEDG) Working Papers 19/17, HEDG, c/o Department of Economics, University of York.
    6. Brewer, Mike & Joyce, Robert & Waters, Tom & Woods, Joseph, 2020. "A method for decomposing the impact of reforms on the long-run income distribution, with an application to universal credit," Economics Letters, Elsevier, vol. 192(C).
    7. Richiardi, Matteo & He, Zhechun, 2020. "Measuring economic insecurity: a simulation approach," Centre for Microsimulation and Policy Analysis Working Paper Series CEMPA2/20, Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research.

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    More about this item

    Keywords

    lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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