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Insurance, Redistribution, and the Inequality of Lifetime Income

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  • Haan, Peter

    (DIW Berlin)

  • Kemptner, Daniel

    (DIW Berlin)

  • Prowse, Victoria L.

    (Purdue University)

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.

Suggested Citation

  • Haan, Peter & Kemptner, Daniel & Prowse, Victoria L., 2018. "Insurance, Redistribution, and the Inequality of Lifetime Income," IZA Discussion Papers 11275, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp11275
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    Cited by:

    1. 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.
    2. Teresa Backhaus, 2022. "Training in Late Careers - A Structural Approach," CRC TR 224 Discussion Paper Series crctr224_2022_382, University of Bonn and University of Mannheim, Germany.
    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. 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.
    5. Korfhage, Thorben, 2019. "Long-run consequences of informal elderly care and implications of public long-term care insurance," Ruhr Economic Papers 813, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. 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.
    7. 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).

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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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