Consumption, wealth, and income inequality: A tale of tails

Arbeitspapier

We provide evidence that the distributions of consumption, labor income, wealth, and capital income exhibit asymptotic power-law behavior with a strict ranking of upper tail inequality, in that order, from the least to the most unequal. We show analytically and quantitatively that the canonical heterogeneous-agent model cannot replicate the proper ranking and magnitudes of these four tails simultaneously. Mechanisms addressing the wealth concentration puzzle in these models through return heterogeneity lead to a mirror consumption concentration puzzle. We match the cross-sectional data on these four Pareto tails by positing a combination of non-homothetic, wealth-dependent preferences and scale-dependent returns to capital. We underscore the importance of these results by showing that all four dimensions of top inequality jointly determine the long-run elasticity that governs the revenue-maximizing capital tax rate.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. WP 2023-43

Classification and Topics

• Classification: Wirtschaft
• Subject: Spending ; Wealth ; Consumption ; Saving ; Income Distribution ; Modeling ; Taxation and Subsidies ; Fiscal Policies ; Firm Behavior

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gaillard, Alexandre ; Hellwig, Christian ; Wangner, Philipp ; Werquin, Nicolas
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2023

Further information

• DOI: doi:10.21033/wp-2023-43
• Handle: http://hdl.handle.net/10419/284084
• Last update: 10.03.2025, 11:42 AM CET