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

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  • David DE LA CROIX

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))

  • Michel LUBRANO

    (GREQAM and CNRS)

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.

Suggested Citation

  • David DE LA CROIX & Michel LUBRANO, 2009. "The Tradeoff Between Growth and Redistribution: ELIE in an Overlapping Generations Model," LIDAM Discussion Papers IRES 2009011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2009011
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    References listed on IDEAS

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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.
    2. Kolm,Serge-Christophe, 2005. "Macrojustice," Cambridge Books, Cambridge University Press, number 9780521835039, October.
    3. Philippe Askenazy & Gilbert Cette & Arnaud Sylvain, 2011. "Le partage de la valeur ajoutée," PSE-Ecole d'économie de Paris (Postprint) halshs-00654669, HAL.
    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 350-373, June.
    5. Philippe Askenazy & Xavier Timbeau, 2003. "Partage de la valeur ajoutée et rentabilité du capital en France et aux États-Unis : une réévaluation ; suivi d'un commentaire de Xavier Timbeau," Économie et Statistique, Programme National Persée, vol. 363(1), pages 167-189.
    6. Michel Lubrano, 2008. "The Redistributive Aspects of ELIE: a simulationapproach," Working Papers halshs-00347278, HAL.
    7. Maddison, Angus, 2007. "Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History," OUP Catalogue, Oxford University Press, number 9780199227204.
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    9. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, October.
    10. Cecilia Garcõa-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, March.
    11. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
    12. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    13. David de la CROIX, 2014. "Economic Growth," LIDAM Discussion Papers IRES 2014019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    14. Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 501-526.
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    1. Fair labor income tax and human capital accumulation
      by Economic Logician in Economic Logic on 2009-09-29 19:30:00

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    Cited by:

    1. Peter J. Stauvermann & Ronald R. Kumar, 2018. "Adult Learning, Economic Growth and the Distribution of Income," Economies, MDPI, vol. 6(1), pages 1-12, February.

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    More about this item

    Keywords

    Education; Growth; Redistribution; Kolm;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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