Abstract
We investigate the effects of a wealth tax on consumption and wealth inequality in a standard small open economy model featuring labour income heterogeneity. We show that consumption inequality and wealth inequality are identical in the long run if consumption growth exceeds output growth. Under this condition, the wealth tax reduces long run inequality under two additional conditions. First, the difference between the rate of return on wealth and the growth rate, r−g, is higher than a positive threshold. Second, the tax rate is lower than a cap which rises in r−g but decreases in labour income heterogeneity.
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