Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173402
Authors: 
Haan, Peter
Kemptner, Daniel
Prowse, Victoria
Year of Publication: 
2017
Series/Report no.: 
DIW Discussion Papers 1716
Abstract: 
In this paper, we study how the tax-and-transfer system reduces the inequality of lifetime income by redistributing lifetime earnings between individuals with different skill endowments and by providing individuals with insurance against lifetime earnings risk. Based on a dynamic life-cycle model, we find that redistribution through the tax-and-transfer system offsets around half of the inequality in lifetime earnings that is due to differences in skill endowments. At the same time, taxes and transfers mitigate around 60% of the inequality in lifetime earnings that is attributable to employment and health risk. Progressive taxation of annual earnings provides little insurance against lifetime earnings risk. The lifetime insurance effects of taxation may be improved by moving to a progressive tax on lifetime earnings. Similarly, the lifetime insurance and redistributive effects of social assistance may be improved by requiring wealthy individuals to repay any social assistance received when younger.
Subjects: 
lifetime earnings
lifetime income
tax-and-transfer system
taxation
unemployment insurance
disability benefits
social assistance
inequality
redistribution
insurance
endowments
risk
dynamic life-cycle models
JEL: 
D63
H23
I24
I38
J22
J31
Document Type: 
Working Paper

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