Fiscal Policy with Agents Differing in Altruism and Ability

This paper explores the effects of a menu of intergenerational fiscal policies (public debt financed by taxes, PAYG social security system, inheritance taxation) in an overlapping-generations model with perfect altruism. It generalizes Barro's model by introducing intragenerational heterogeneity; in other words, households differ in productivity and altruism. Within such a model, wealth is held entirely in the steady state by those families with the highest degree of altruism. Under plausible assumptions, both public debt and social security are neutral "à la" Ricardo, while inequality increases. Also, estate taxation can be Pareto-worsening even though it fosters income equality. Copyright (c) The London School of Economics and Political Science 2005.