Working Paper: NBER ID: w21191
Authors: Joseph E. Stiglitz
Abstract: This paper extends the standard life cycle model to a world in which there are also capitalists. We obtain simple formulae describing the equilibrium fraction of wealth held by life-cycle savers. \n\nUsing these formulae, we ascertain the effects of tax policy or changes in the parameters of the economy. The relative role of life cycle savings increases with the rate of growth and with the relative savings rate of life-cycle savers and capitalists. An increase in the savings rate of workers has no effect on output per capita; life cycle savings simply crowds out inherited savings. A tax on capital (even if proceeds are paid out to workers) is so shifted that capitalists are unaffected and that workers’ income (after transfers) and their share in national wealth are reduced. If the government invests the proceeds, the share of capital owned by life cycle savers may increase.\n\nWe extend the analysis to endogenously derive the distribution of the population between life cycle savers and capitalists, in a model in which all individuals have identical non-linear savings functions. When wealth is low enough, bequests drop to zero. With stochastic returns, individuals move between the two groups.\n\nA second extension analyzes the effects of land. We ask whether land holding displaces the holding of capital, resulting in workers being worse off. A tax on land, while reducing the value of land, leaves unchanged the capital-labor ratio, output per capita, and wages. But the tax reduces the aggregate value of wealth, and if the proceeds of the tax are distributed to workers, their income and life cycle savings are increased. On both accounts, wealth inequality is reduced. Thus, consistent with Henry George’s views, a tax on the returns on land, including capital gains, reduces inequality with no adverse effect on national income.
Keywords: Inequality; Life Cycle Savings; Inherited Wealth; Tax Policy
JEL Codes: D31; D91; E21; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the savings rate of workers (D14) | crowding out of inherited savings (D15) |
| crowding out of inherited savings (D15) | no effect on output per capita (O49) |
| tax on capital (F38) | decrease in workers' income (F66) |
| tax on capital (F38) | decrease in national wealth share of workers (D33) |
| tax on capital (F38) | capitalists remain unaffected (P12) |
| land taxation (R51) | increase in workers' savings (D14) |
| land taxation (R51) | reduction in wealth inequality (D31) |