Rising earnings inequality and optimal income tax and social security policies

Abstract

How did the US government preferences over income redistribution across generations and within generations change during 1980–2010? Using a rich quantitative model in which a Ramsey government chooses income taxation and Social Security, I decompose the total change in the actual policies into the impact of new economic and demographic conditions and government preferences. I find that the US government preferences have shifted toward more educated and older households since the 1980s. Preferences over income redistribution within and across generations interact and, therefore, must be analyzed jointly.