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Political Economy of Taxation in an Overlapping-Generations Economy

Discussion Paper 133 | Published December 1, 1999

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Political Economy of Taxation in an Overlapping-Generations Economy

Abstract

This paper builds a simple but complete model of a political system to analyze the effects of intergenerational conflicts on capital and labor income tax rates, transfers, and government spending. I show how the different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. I also show that there is a natural link between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement.