Published by Institute for Fiscal Studies in October 2012 [I must have missed it at the time but it’s definitely worth reading]
In this paper we look at lifetime inequality to address two main questions:
- How well does a modern tax system, based on annual information, target lifetime inequality?
- What aspects of the transfer system are most progressive from a lifetime perspective?
We look at lifetime inequality and the redistribution properties of taxes and beneﬁts using a dynamic life-cycle model of women’s education, labour supply and savings with family dynamics and rich individual heterogeneity in preferences and productivity.
The model is coupled with a detailed description of the UK personal tax and beneﬁt system and is estimated on UK longitudinal data covering the 1990s and early 2000s.
We show that the tax and beneﬁts system is more redistributive from an annual than from a lifetime perspective, and is most progressive at the bottom of the income distribution in both cases.
We then establish that heterogeneity in family experiences throughout adult life is the main vehicle through which the tax and beneﬁts system moderates lifetime inequality. Although transitory, family conditions under which working is especially costly, such as lone-motherhood, are especially prevalent among the lifetime poor. By targeting this group, particularly using policies speciﬁcally designed to improve the work incentives of those with the lowest earnings capacity, the tax and beneﬁts system does achieve life-cycle redistribution. Other policies like universal beneﬁts towards family with children are less well targeted towards the lifetime poor but are more progressive and improve the work incentives in the middle 60% of the distribution of lifetime income.
JEL codes: H23, H24, I24, I38, J22, J24,
Full text (PDF 50pp)