The Timing of Redistribution

We investigate whether late redistribution programs that can be targeted towards low income families, but may distort savings decisions, can “dominate” early redistribution programs that cannot be targeted due to information constraints. We use simple two-period OLG models with heterogeneous agents under six policy regimes: A model calibrated to the U.S. economy (benchmark), two early redistribution (lump sum) regimes, two (targeted) late redistribution regimes, and finally a model without taxes and redistribution. Redistribution programs are financed by a labor tax on the young and a capital tax on the old generation. We argue that late redistribution, if the programs are small in size, can dominate early redistribution in terms of welfare but not in terms of real output. Better targeting of low income households cannot completely offset savings distortions. In addition, we find that the optimal transfer and tax policy implies a capital tax of 100 percent and transfers exclusively to the young generation. JEL Classification: H20, H22