Working Paper: CEPR ID: DP2930
Authors: Assaf Razin; Efraim Sadka; Phillip Swagel
Abstract: Data for the United States and countries in Western Europe indicate a negative correlation between the dependency ratio and labour tax rates and the generosity of social transfers, after controlling for other factors that influence the size of the welfare state. This is despite the increased political clout of the dependent population implied by the aging of the population. This Paper develops an overlapping generations model of intra-and inter-generational transfers (including old-age social security) and human capital formation which addresses this seeming puzzle. We show that with democratic voting, an increase in the dependency ratio can lead to lower taxes or less generous social transfers.
Keywords: fiscal leakage; overlapping generations model; pay-as-you-go tax transfer system
JEL Codes: H00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dependency ratio (J19) | labor tax rates (J89) |
| dependency ratio (J19) | generosity of social transfers (D64) |
| dependency ratio (J19) | political equilibrium tax rate (H29) |
| median voter's status as net contributor or beneficiary (D63) | political equilibrium tax rate (H29) |
| dependency ratio (J19) | working-age population's willingness to accept higher taxes (H31) |