Insurance, Redistribution, and the Inequality of Lifetime Income

Abstract

Individuals vary considerably in how much they earn during their lifetimes. This study examines the role of the tax‐and‐transfer system in mitigating such inequalities, which could otherwise lead to disparities in living standards. Utilizing a life‐cycle model, we determine that the tax‐and‐transfer system offsets 45% of lifetime earnings inequality attributed to differences in productive abilities and education. Additionally, the system insures against 47% of lifetime earnings risk. Implementing a lifetime tax reform that links annual taxes to prior employment could enhance the system's insurance function, though it may involve tradeoffs in terms of employment and overall welfare.