Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284084 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. WP 2023-43
Version Description: 
Revised: December 23, 2023
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
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.
Subjects: 
Spending
Wealth
Consumption
Saving
Income Distribution
Modeling
Taxation and Subsidies
Fiscal Policies
Firm Behavior
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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