DP12873 Socially Optimal Wealth Inequality

Author(s): Pietro Reichlin
Publication Date: April 2018
Keyword(s): Capital taxation, inequality, Wealth
JEL(s): D31, E21, H21, J62
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12873

I discuss two alternative notions of social welfare (utilitarian and self-enforcing) in a dynastic model with heterogeneous and persistent degrees of parental altruism and evaluate the implied levels of consumption inequality. Then, I study a decentralization of planning optima in a competitive equilibrium where the only source of inequality arises from intergenerational wealth transmission and I show that the self-enforcing criterion implies a negative tax rate on the less altruistic individuals' capital income.