The Impact of Taxation and Public Education on Intergenerational Earnings Persistence

The document begins by addressing the intergenerational earnings persistence observed across various countries. It highlights a significant disparity in earnings mobility, particularly between Western economies. The impact of taxation and public education expenditure emerges as a focal point. The author notes that countries like the US, Britain, and Southern Europe exhibit higher persistence, while Northern Europe and Canada show lower rates. This raises critical questions about the underlying factors contributing to these differences. The author emphasizes the need to understand whether public institutions influence economic outcomes. The findings suggest that public expenditure and tax policies play a crucial role in shaping these dynamics. The document sets the stage for a deeper exploration of how these elements interact to affect earnings persistence.

The author develops an intergenerational life-cycle model to analyze the determinants of earnings persistence. This model incorporates various factors, including progressive taxation, public education expenditure, and borrowing constraints. By calibrating the model to US data, the author aims to quantify the contributions of these elements to earnings persistence. The analysis reveals that individual investments in human capital account for 62% of the estimated persistence in the US. The model's design allows for a nuanced understanding of how different policies can influence economic mobility. The author also acknowledges the limitations of existing literature, noting the lack of quantitative studies on the impact of cross-country policy differences on earnings persistence.

The findings indicate a strong negative correlation between intergenerational earnings persistence and both tax progressivity and public expenditure on tertiary education. The author presents data showing that higher taxes and increased education spending correlate with lower earnings persistence. For instance, the introduction of a Danish tax system in the US could reduce the intergenerational elasticity of earnings significantly. The analysis suggests that taxation explains 25% of the difference in earnings persistence between the US and ten other countries, while education expenditure accounts for 35% of the variance. These insights underscore the importance of policy design in shaping economic outcomes and highlight the potential for targeted interventions to enhance mobility.

The document concludes with a discussion on the policy implications of the findings. The author argues that understanding the relationship between taxation, public education, and earnings persistence is vital for effective policy-making. The evidence suggests that increasing government expenditure on education and implementing progressive tax systems can significantly enhance economic mobility. The author emphasizes the need for policymakers to consider these factors when designing interventions aimed at reducing inequality. By addressing the barriers to human capital investment, such as borrowing constraints, governments can foster a more equitable economic landscape. The insights provided in this document serve as a valuable resource for policymakers and researchers alike, offering a framework for understanding the complex interplay between taxation, education, and economic mobility.