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Demographics and Fiscal Policy in a Political Economy

Year: 2025
Type: dissertation
Abstract: I study how demographic shifts shape age-targeted fiscal policies---including taxation, public education, and old-age benefits---in a political equilibrium. In Chapter 1, I develop a three-period overlapping generations model where individuals at different life stages form age-specific policy preferences and vote to collectively determine fiscal policy. In a political equilibrium, baby boom generation leverages its demographic advantage to shape fiscal policy throughout its life-cycle---enjoying low labor income taxes during working years while imposing high capital taxes on retirees, and later benefiting from generous old-age transfers and low capital tax rates in retirement. Despite this political influence, the baby boom generation experience lower welfare than neighboring generations, however, due to diluted per-student education investment during their student years. Chapter 2 extends this framework by introducing within-generation heterogeneity in human capital accumulation ability. I examine how income inequality affects fiscal outcomes, comparing earnings-proportional versus uniform old-age benefit systems. Income heterogeneity creates political coalitions of workers and low-skilled retirees to drive up capital tax rates that primarily burden high-skilled retirees. Workers' support for education spending also varies by benefit structures, with stronger support under the earnings-proportional system than under the uniform system. These additional dynamics produce fiscal policy outcomes different from those in the homogeneous agent model, demonstrating how both demographic structure and income inequality jointly determine political equilibria.
Source: Libra
DOI: 10.18130/55m8-3116
Author: Soo Youn Kang
Language: English
Open Access status: green
OpenAlex ID: W6925580149
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