Capital wealth taxation as a potential remedy for excessive capital wealth inequality

Abstract

In this paper, it is first shown that a simple model of inheritance and chance, neither of which involve entrepreneurial or other productive contributions on the part of the capital owner, is quite successful in predicting the empirical capital wealth distribution in the United States as indicated by data taken from the 2004 Survey of Consumer Finances. To the extent that an extremely high level of capital wealth inequality does not play an essential role in maintaining effort incentives and economic prosperity, the possibility of reducing it via taxation becomes more attractive. Estate taxation has been in existence for a long time, but model simulations suggest that while it can slow the rise of capital wealth inequality from an initial condition of perfect equality, once capital wealth inequality has reached a high level, it is ineffective in reducing this level. However, further model simulations indicate that even a relatively modest rate of annual capital wealth taxation can be highly effective toward this end.

Keywords:

• capital wealth
• distribution
• estate taxation
• inequality
• Survey of Consumer Finances
• wealth taxation