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Investment Risk, Pareto Distribution, and the Effects of Tax

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  • NIREI Makoto

Abstract

This paper investigates the effects of taxation on the distributions of income and wealth and on the welfare of heterogeneous households. I first demonstrate that the tails of income and wealth distributions converge to a Pareto distribution in a Bewley model in which households bear idiosyncratic investment shocks. This result extends the previous analysis in Nirei (2009). Thereafter, a non-distortionary tax and flat-rate taxes on capital income and consumption are introduced, and their impacts on aggregate wealth, the inequality index, households' welfare, and transition paths are quantitatively investigated. When the tax rate is set to generate the same GDP-government expenditure ratio, the model with capital tax generates smaller aggregate wealth and a smaller inequality index than the case with consumption tax or non-distortionary tax.

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  • NIREI Makoto, 2011. "Investment Risk, Pareto Distribution, and the Effects of Tax," Discussion papers 11015, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:11015
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    References listed on IDEAS

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    Cited by:

    1. Shuhei Aoki & Makoto Nirei, 2016. "Pareto Distribution of Income in Neoclassical Growth Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 25-42, April.

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