The steady-state effect on inequality of linear redistributive schemes based on the taxation of earnings, inheritances, or some combination of the two is examined. Dynasties that exhibit asexual reproduction and altruism are modeled. Earnings ability, which may be correlated across generations, is exogenous and drawn from a stationary distribution. Taxing inheritances increases inequality by reducing the intergenerational averaging of "luck." In an example, paying out the tax revenue in uniform transfers typically does not reverse this result. Taxing lifetime wealth or income adds a lump-sum tax on earnings, making redistribution more successful. However, this success is sensitive to the relative size of mean earnings and inheritances.

An empirically grounded micro-simulation of saving, with bequests related negatively either in total to average children's income or separately to individual children's incomes, is constructed for a single generation in a steady growth economy. Behavioral parameters are set so that predicted bequests to the next generation are consistent with both the scale and assignment of inheritances (taken from a real-world source) for the simulation generation. The relative impact of inheritance and other factors on different aspects of economic inequality is assessed. While inheritance is a major cause of wealth inequality, its influence on annual income and lifetime resources is small, and in the latter case ambiguous. … Inheritance perpetuates and may intensify inequalities arising originally from other causes. In that sense, it is a secondary cause of inequality; but that is not, of course, to say that it is of secondary importance. The extent of its influence on distribution remains an open question, which cannot be decided merely by theoretical reasoning … but requires in addition something in the nature of a quantitative analysis of the relevant facts. -Wedgwood, 1929, pp. 60–61.

This paper asks whether the continued accumulation, or mild dissaving, observed among the retired can be explained by uncertain lifetime. In the absence of annuities, after an initial period influenced by borrowing constraints, under constant relative risk aversion, uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is "small." Illustrative computations, based on actual income and survival data, show that plausible elasticities are sufficiently small to give this effect. The reduction in consumption is large enough to explain much of the lack of decumulation by the elderly.

This paper reports a set of lifetime tax incidence calculations using a life cycle simulation model for Canada due to Davies (1979a, 1982). A repeatedly stated qualification to annual calculations in the empirical tax incidence literature is that it would be more satisfactory to make calculations on a lifetime basis. Even though it is acknowledged that lifetime tax incidence could well differ from annual, it is widely believed that data and other difficulties make such calculations next to impossible. Indeed, the widespread acceptance of the data problems of lifetime calculations seems also to have inhibited speculation about how lifetime tax incidence might differ from annual. As a result, redistributive tax policy judgments continue to be based on annual incidence calculations in spite of the reservations many have about their usefulness. Our paper is intended to reorient discussion towards lifetime tax incidence by providing some initial null hypotheses about the shape of lifetime tax profiles. Our main finding is that under the standard competitive assumptions common in the incidence literature, lifetime and annual incidence calculations both produce mild progression in tax rates across household deciles (ignoring the bottom decile in the annual calculation). While the income tax is less progressive in lifetime than in annual calculations, other taxes are for the most part less regressive. Also, lifetime incidence calculations are much more robust to alternative shifting assumptions than annual calculations. In the lifetime context, key distributions such as earnings, transfer payments, and consumption are less heavily concentrated in particular percentiles of the population than is true in annual data. As a result, changing the allocative series for any particular tax does not have the large effect on incidence results found in annual calculations.' Each component of the tax system is allocated to households grouped by lifetime income using particular distributive series following a procedure similar to that employed in annual incidence calculations (for example, Richard Musgrave et al., 1974; Joseph Pechman and Benjamin Okner, 1974; Edgar Browning and William Johnson, 1979; W. Irwin Gillespie, 1980). In the process we are able to compare lifetime and annual incidence calculations using the same data set. In both lifetime and annual calculations, we allocate five groups of taxes among households using distributive series which come partly from the 1971 Statistics Canada Survey of Consumer Finances (SCF) and partly from our life cycle simulation model. The SCF data are used to construct synthetic longitudinal lifetime profiles of earnings and transfer payments for a sample of 500 households. The latter are assigned inheritances by simulating patterns of mortality and bequest. These data are then used in the life cycle model to generate lifetime consumption profiles and bequests. The earnings, transfer, and inheritance data, plus the model output provide the distributive series on which alternative incidence calculations are based. While the incidence calculations presented in this paper use Canadian data, results would likely be similar for the United States