The Adverse Economic Consequences of Extremely High Capital-Wealth Inequality

Abstract

Rising has become a major topic of discussion in the economics literature over the last few years.' Although the primary focus of this literature is on evidence of increasing inequality in the distribution of labor income, there is often a subsidiary focus on the high level of inequality in capital wealth distribution. Edward N. Wolff (1987, 1989, 1992, 1994), on the basis of careful analysis of microdata provided by the various Federal Reserve Board surveys of wealth and income, finds evidence of significant increases in inequality with respect to both total wealth and financial capital wealth in the United States since the early 1960s. In response to this trend, proposals for wealth taxation and/or taxation of inheritances are being more widely discussed: Burbridge (1991), Carroll (1989, 1991), Cremer and Pestieau (1988), Dovring (1991), Dugger (1990), Inhaber and Carroll (1991), Kiesling (1992), Piggott (1989), Toshiyuki (1991), and Wolff (1995). Among contemporary economists, it is a widely accepted proposition that extremely unequal capital wealth distribution in the United States and the other industrialized nations constitutes a socioeconomic liability and, to some extent, progressive income taxation (albeit distortionary) is justified as offsetting this liability. But there is a wide spectrum of opinion regarding the seriousness ofthe liability and the degree to which progressive income taxation should be applied as a corrective device. The literature on the equity-efficiency tradeoff' has deeply instilled the