The effect of ability inheritance on income distribution and social mobility is analyzed with an emphsis on the role of progressive income tax. Epstein-Zin style utility function is used to highlight the role of risk aversion. The result shows that higher genetic inheritability leads to lower per capita income, higher income variance and lower aggregate welfare at the steady state. This tendency is intensified when the elasticity of a child's income to parent's educational investment is higher. In this setup, it is shown that progressive income tax can be a welfare-enhancing tool by increasing social mobility. The optimal progressive income tax rate is obtained in the benchmark model and its positive effect is discussed in the context of "Veil of ignorance", a concept proposed by Rawls (A Theory of Justice (Cambridge, MA: Harvard, University Press), 1971).
All Science Journal Classification (ASJC) codes
- Business and International Management
- Economics, Econometrics and Finance(all)
- Political Science and International Relations