Abstract
The authors examine the determinants of the personal distribution of income and wealth using an overlapping generations model in which all individuals are assumed to be identical except for their inherited wealth. "It is shown that, in general, higher tax rates reduce distributive inequality as long as the rate of interest is exogenously given. In steady state, however, where the rate of interest is determined endogenously, increasing taxation and higher social security payments both diminish the capital labor ratio so that the rate of interest rises. If this interest effect is strong enough then it may outbalance the tendency toward more equality because higher interest rates enhance initial differences in the distribution of both income and wealth and, eventually, the inequality in the distribution of income and wealth in the society." The geographical focus is on developed countries.
Published Version
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