Mobility, Taxation and Welfare

36 Pages Posted: 20 Jun 2011

See all articles by Sami Bibi

Sami Bibi

Université Laval - Département d'Économique

Jean-Yves Duclos

Laval University; IZA Institute of Labor Economics

Abdelkrim Araar

Université Laval - Département d'Économique

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Abstract

Income mobility is often thought to equalize permanent incomes and thereby to improve social welfare. The welfare analysis of mobility often fails, however, to account for the cost of the variability of periodic incomes around permanent incomes. This paper assesses the net welfare benefit of mobility by assuming both a social aversion to inequality in permanent incomes and an individual aversion to variability in periodic incomes. The paper further investigates the combined (and comparative) impact of mobility and of the tax system (another presumed income equalizer) on the dynamics of income across time and on the inequality of income across individuals. Using panel data, we find that Canada's tax system limits significantly the redistributive impact of mobility while also lowering considerably the cost of income variability. The permanent income equalizing effect of taxes can reach up to 23 percent of mean income at the higher values of inequality aversion that we use. Globally, the net social welfare effect of both mobility and taxation is (almost always) positive and substantial, often amounting to around 30 percent of mean income. For all choices of parameter values, the tax effect exceeds by far the net effect of mobility on inequality and social welfare.

Keywords: mobility, social welfare, risk, income variability, inequality, permanent income

JEL Classification: D31, D63, H24

Suggested Citation

Bibi, Sami and Duclos, Jean-Yves and Araar, Abdelkrim, Mobility, Taxation and Welfare. IZA Discussion Paper No. 5757. Available at SSRN: https://ssrn.com/abstract=1867026

Sami Bibi (Contact Author)

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
DeSeve
Quebec Canada, QC G1K 7P4
Canada

Jean-Yves Duclos

Laval University ( email )

Quebec G1K 7P4
Canada
418-656-7096 (Phone)
418-656-9727 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Abdelkrim Araar

Université Laval - Département d'Économique ( email )

CREFA
Ste-Foy, Quebec 179Que G1K
Canada

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