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Individuals vary considerably in how much they earn during their lifetimes. This study examines the role of the tax-and-transfer system in mitigating such inequalities, which could otherwise lead to disparities in living standards. Utilizing a life-cycle model, we determine that taxes and transfers offset 45% of lifetime earnings inequality attributed to differences in productive abilities and education. Additionally, the system insures against 48% of lifetime earnings risk. Implementing a lifetime tax reform linking annual taxes to previous employment could improve the system’s insurance capabilities, albeit at the cost of a lower employment rate.
Authors
Research Fellow DIW Berlin
Head of department of Public Economics at DIW Berlin and Professor of Public Economics at Freie Universität Berlin.
Daniel Kemptner
Professor of Economics Purdue University
PhD Candidate FU Berlin and DIW Berlin
Working Paper details
- DOI
- 10.1920/wp.ifs.2023.3323
- Publisher
- Institute for Fiscal Studies
Suggested citation
Haan, P et al. (2023). Insurance, redistribution, and the inequality of lifetime income. 23/33. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/insurance-redistribution-and-inequality-lifetime-income (accessed: 27 April 2024).
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