Tax and Education Policy in a Heterogeneous‐Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?

By Roland Bénabou. 2002

693 citations recorded by the source corpus.

This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous-agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model that yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in plausible values for the optimal rates. Aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f98b775c019573d24acf1a469f9c88ff206a1c52

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Citations in the corpus

Insurance and Opportunities: A Welfare Analysis of Labor Market Risk (2008, neutral): “Formally, our strategy for identifying these two components closely follows that outlined by Flodén (2001), who in turn builds on earlier work by Benabou (2002).”
The evolution of wealth inequality over half a century: The role of taxes, transfers and technology (2016, positive): “income tax system, which can be approximated by a log-linear form for income levels outside the top of the income distribution (Bénabou, 2002), augmented by a flat rate for the top income tax bracket.”
Das Human Kapital: A Theory of the Demise of the Class Structure (2004, neutral): “See Benabou (2002) as well.”
The Technology of Skill Formation (2007, positive): “Important developments of this work by Laitner (1992, 1997), Benabou (2000, 2002), Aiyagari, Greenwood, Seshadri (2002) and Seshadri and Yuki (2003), emphasize the role of credit constraints and altruism in forming the skills of children.”
The Inequality of Influence (2002, neutral): “…theoretical literature on inequality and growth includes: Aghion and Williamson (1998), Alesina and Rodrik (1994), Banerjee and Newman (1991, 1993), Benabou (1996a, 1996b, 2002), Murphy, Shleifer, and Vishny (1989), Perotti (1993), Persson and Tabellini (1994), Piketty (1997), and Rajan and…”
Redistribution, Inequality, and Growth (2014, background): “The relationship between inequality and growth may be nonlinear, as in the theoretical model of Benhabib (2003), in which increases in inequality from low levels provides growth-enhancing incentives, while increases past some point encourage rent-seeking and lower growth.”
Non-linear Capital Taxation Without Commitment (2012, neutral): “Benabou (2002) constructs a model with human capital, instead of physical capital, and studies non-linear taxation of income, within a one-dimensional parametric class.”
Fiscal multipliers in the 21st century (2016, positive): “Taxes and Social Security18 As described in Section 9.1 we apply the labor income tax function in Equation 12, proposed19 by Benabou (2002).”
Interpreting the Evidence on Life Cycle Skill Formation (2005, positive): “Their setup extends the framework developed in the income fluctuation literature analyzed by Schechtman (1976), Bewley (1986), Clarida (1987), Laitner (1979, 1992), Huggett (1993), and Aiyagari (1994) to account for child investment decisions.”
The Long-Term Distributional and Welfare Effects of Covid-19 School Closures (2020, positive): “The labor income tax code is approximated by the following two-parameter function, as in, e.g., Benabou (2002) and Heathcote et al. (2017): T (y) = y − λy1−τ , where τ is the progressivity parameter and λ determines the average tax rate.”
Investing in Our Young People (2010, neutral): “The existing economic models of child development treat childhood as a single period (see, e.g., Becker & Tomes, 1986; Aiyagari, Greenwood, & Seshadri, 2002; Benabou, 2002).”
Knowledge Growth and the Allocation of Time (2014, positive): “The model can easily be extended to encompass the case in 16 See Becker and Tomes ð1979Þ, Benabou ð2002Þ, and Benhabib, Bisin, and Zhu ð2011Þ for alternative theories of the relationship between inequality and the degree of intragenerational mobility.”
Taxation and Labor Supply of Married Couples Across Countries: A Macroeconomic Analysis (2018, positive): “In order to do so, we abstract from heterogeneity in education, and assume the simplified labor income tax schedule introduced by Benabou (2002). After-tax income is given by ynet = (1 d )(wh)(1) z , where z measures the degree of tax progressivity, and d is a measure of the average tax rate.”