Fiscal Policy, Composition of Intergenerational Transfers, and Income Distribution

In this paper, we characterize the relationship between the initial distribution of human capital and physical inheritances among individuals and the long-run distribution of these two variables. In a model with indivisible investment in education, we analyze how the initial distribution of income determines the posterior inter-generational mobility in human capital and the evolution of intra-generational income inequality. This analysis enables us in turn to characterize the effects of fiscal policy on future income distribution and mobility when the composition of inter-generational transfers is endogenous. We find that a tax on inheritance results in both less inter-generational mobility and smaller investment in human capital. However, a tax on labor income may promote human capital accumulation if the education premium is sufficiently high.