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January 2024

This paper studies the trade-offs associated with income redistribution in an overlapping gen-
erations model in which savings rates increase with permanent income. By transferring resources
from high savers to low savers, redistribution lowers aggregate savings, and depresses investment. I
derive sufficient conditions under which this savings behavior generates a welfare trade-off between
permanent income redistribution and capital accumulation in the short and long run. I quantify the
size of this trade-off in two ways. First, I derive a sufficient statistic formula for the impact of this
channel on welfare, and estimate the formula using U.S. household panel data. When redistribution
is done with a labor income tax, the welfare costs associated with my channel are around 1/3 the
size of those associated with labor supply distortions. Second, I solve a quantitative overlapping
generations model with un-insurable idiosyncratic earnings risk in which savings rates increase with
permanent income calibrated to the U.S. in 2019. In this setting, I find that around 17 percent of
the trade-off between labor income redistribution and average consumption can be attributed
to my channel

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