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Tax-transfer Policy with Altruists and Non-altruists

  • Philippe Michel
  • Pierre Pestieau
Chapter
Part of the International Economic Association Series book series (IEA)

Abstract

This chapter analyzes the effect of different fiscal instruments, taxes on wages and capital income, along with public borrowing, on the welfare of individuals. The setting is that of a simple non-overlapping generations growth model wherein two types of individual coexist: altruists and non-altruists. If we consider the standard overlapping generations model after Diamond (1965), wherein individuals are pure life-cyclers and have an endogenous labour supply, we know that the market outcome can be inefficient but at the same time that public borrowing can restore efficiency. We also know from Atkinson and Sandmo (1980) and Stiglitz (1985) that taxing not only wage income but also capital income is generally desirable. On the other hand, if we turn to the infinite-lived individuals model (alternatively an overlapping generations model wherein individuals are altruistic and are linked to successive generations through a chain of operative bequests,2 we expect an efficient outcome along with debt neutrality. Regarding taxation, the standard result is that, under rather general conditions, the optimal tax rate on capital income is equal to zero in the long run (Chamley, 1986).

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References

  1. Atkinson, A. B. and Sandmo, A. (1980) ‘Welfare Implications of the Taxation of Savings’, Economic Journal, vol. 90, pp. 529–49.CrossRefGoogle Scholar
  2. Barro, R. J. (1974) ‘Are Government Bonds Net Wealth?’, Journal of Political Economy, vol. 82, pp. 1095–117.CrossRefGoogle Scholar
  3. Caballe, J. (1995) ‘Growth Effects of Fiscal Policy under Altruism and Low Elasticity of Intertemporal Substitution’, IAE WP. 909.95: Autonomous University of Barcelona.Google Scholar
  4. Chamley, C. P. (1986) ‘Optimal Taxation of Capital in General Equilibrium with Infinite Lives’, Econometrica, vol. 54, pp. 607–22.CrossRefGoogle Scholar
  5. Diamond, P. A. (1965) ‘National Debt in a Neoclassical Growth Model’, American Economic Review, vol. 55, pp. 1126–50.Google Scholar
  6. Michel, P. and Pestieau, P. (1998) ‘Fiscal Policy in a Growth Model with both Altruistic and Nonaltruistic Agents’, Southern Economic Journal, vol. 64, pp. 682–98.CrossRefGoogle Scholar
  7. Michel, P. and Pestieau, P. (1999) ‘Fiscal Policy in a Growth Model where Individuals Differ as to Altruism and Labour Supply’, Journal of Public Economic Theory, 1, pp. 187–203.CrossRefGoogle Scholar
  8. Stiglitz, J. E. (1985) ‘Inequality and Capital Taxation’, IMSS Technical Report No. 457, Palo Alto, Calif.: Stanford University Press.Google Scholar

Copyright information

© International Economic Association 2000

Authors and Affiliations

  • Philippe Michel
    • 1
  • Pierre Pestieau
    • 2
  1. 1.University of the MediterraneanMarseillesFrance
  2. 2.University of LiègeBelgium

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