Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure

63 Pages Posted: 5 Jan 2012 Last revised: 9 Jul 2014

See all articles by Hans Aasnes Holter

Hans Aasnes Holter

University of Oslo - Department of Economics

Date Written: June 25, 2014

Abstract

I document a strong negative cross-country correlation between intergenerational earnings persistence and measures of tax progressivity - and level, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features, progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the US changes as I introduce tax - and education expenditure policies from other countries. I find that individual investments in human capital account for 73% of the estimated intergenerational earnings persistence in the US. Taxation, through its impact on investments in human capital, can explain 50% of the variation between the US and 10 other countries, whereas borrowing constraints, which have received much attention in the literature, have a limited impact on earnings persistence.

Keywords: Intergenerational Earnings Persistence, Taxation, Public Education Expenditure

JEL Classification: E24, E62, H31, H52, J62, J68

Suggested Citation

Holter, Hans Aasnes, Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure (June 25, 2014). Available at SSRN: https://ssrn.com/abstract=1978261 or http://dx.doi.org/10.2139/ssrn.1978261

Hans Aasnes Holter (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47-22855108 (Phone)

HOME PAGE: http://sites.google.com/site/hansaholter/

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