Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?

EconometricaVolume 70, Issue 2 p. 481-517 Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency? Roland Bénabou, Roland Bénabou Woodrow Wilson School and Dept. of Economics, Princeton University, Princeton NJ 08544, USA; NBER, CEPR, and [email protected]Search for more papers by this author Roland Bénabou, Roland Bénabou Woodrow Wilson School and Dept. of Economics, Princeton University, Princeton NJ 08544, USA; NBER, CEPR, and [email protected]Search for more papers by this author First published: 12 December 2003 https://doi.org/10.1111/1468-0262.00293Citations: 310Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Abstract This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous-agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model that yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in plausible values for the optimal rates. Aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff. Citing Literature Volume70, Issue2March 2002Pages 481-517 RelatedInformation