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The Tradeoff Between Growth and Redistribution: ELIE in an Overlapping Generations Model

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Author Info
David De La Croix () (CORE - Department of Economics - Université Catholique de Louvain)
Michel Lubrano () (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)

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Abstract

The ELIE scheme of Kolm taxes labour capacities instead of labour income in order to circumvent the distortionary effect of taxation on labour supply. Still, Kolm does not study the impact of ELIE on human capital formation and investment. In this paper, we build an overlapping generations (OLG) model with heterogenous agents and endogenous growth driven by investment in human capital. We study the effect of ELIE on education investment and other aggregate economic variables. Calibrating the model to French data, we highlight a tradeoff between growth and redistribution. With a perfect credit market, ELIE is successful in reducing inequalities and poverty, but it is at the expense of lower investment in education and slower growth. In an economy with an imperfect credit market where individuals cannot borrow to educate, the tradeoff between growth and redistribution is not overturned but is less severe. However, it is possible to overturn completely that trade-off simply by changing the base of taxation for the young generation which is equivalent to subsidising education.

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Paper provided by HAL in its series Working Papers with number halshs-00382513_v1.

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Date of creation: 07 May 2009
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Keywords: Education; Growth; Redistribution; Kolm;

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  1. De Gregorio, Jose & Kim, Se-Jik, 2000. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 579-607, August.
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  2. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May. [Downloadable!] (restricted)
  3. CECILIA GARCÍA-PEÑALOSA & STEPHEN J. TURNOVSKY, 2007. "Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 369-394, 03. [Downloadable!] (restricted)
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  4. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-73, June.
  5. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May. [Downloadable!] (restricted)
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