DP4254 Fiscal Policy with Agents Differing in Altruism and in Ability

Author(s): Philippe Michel , Pierre Pestieau

Publication Date: February 2004

Keyword(s): D64 , Altruism , public debt , social security , estate tax

JEL(s): E62 , H20 , H55

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4254.asp

This Paper explores the effects of a menu of inter-generational fiscal policies (public debt financed by taxes, PAYG social security system and inheritance taxation) in an overlapping generations model with perfect altruism. It generalizes the model by Barro (1974) by introducing intra-generational heterogeneity. In other words, households differ in productivity and altruism. Within such a model wealth is entirely held in the steady-state by the families with the highest degree of altruism. Under plausible assumptions both public debt and social security are neutral à la Ricardo, while increasing inequality. Also, estate taxation can be Pareto worsening even though it fosters income equality.