Tax-transfer Policy with Altruists and Non-altruists

Abstract

This chapter analyzes the effect of different fiscal instruments, taxes on wages and capital income, along with public borrowing, on the welfare of individuals. The setting is that of a simple non-overlapping generations growth model wherein two types of individual coexist: altruists and non-altruists. If we consider the standard overlapping generations model after Diamond (1965), wherein individuals are pure life-cyclers and have an endogenous labour supply, we know that the market outcome can be inefficient but at the same time that public borrowing can restore efficiency. We also know from Atkinson and Sandmo (1980) and Stiglitz (1985) that taxing not only wage income but also capital income is generally desirable. On the other hand, if we turn to the infinite-lived individuals model (alternatively an overlapping generations model wherein individuals are altruistic and are linked to successive generations through a chain of operative bequests,2 we expect an efficient outcome along with debt neutrality. Regarding taxation, the standard result is that, under rather general conditions, the optimal tax rate on capital income is equal to zero in the long run (Chamley, 1986).