Government Debt and Wealth Inequality: Theory and Insights from Altruism

High levels of either public debt or wealth inequality are detrimental to social and economic stability. At a time when reducing public debt and decreasing wealth inequality have become important policy priorities, the question arises about whether these two goals stand in conflict. Here, we show that, indeed, a reduction of government debt increases wealth inequality regardless of who bears the tax burden. Our model builds on a simple yet plausible wealth-accumulation process, where generations are linked through joy-of-giving bequests, and taxes fall on labour income. Predictions of the model are consistent with growing evidence that debt adjustments amplify economic inequalities.