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Public Finance Implications of Economic Inequality

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  • Alan J. Auerbach

Abstract

This paper considers questions about the implications of rising inequality for the theory and practice of public finance. It begins by addressing fundamental reasons why the distribution of income or wealth on an annual basis before taxes and transfers offers insufficient information: (1) it does not tell us what resources are actually available to households for consumption; and (2) in providing a snapshot of the resources available to individuals of different ages at a given moment in time, without controlling for life-cycle related differences or income dynamics, it can provide a misleading estimate of the underlying degree of inequality. The paper then considers the implications of high and perhaps rising economic inequality for the design of government policy: top marginal tax rates, phase-outs of government policies for those with higher incomes, the political economy of inequality, and other subjects.

Suggested Citation

  • Alan J. Auerbach, 2025. "Public Finance Implications of Economic Inequality," Journal of Economic Perspectives, American Economic Association, vol. 39(2), pages 149-170, Spring.
    • Handle: RePEc:aea:jecper:v:39:y:2025:i:2:p:149-70
    DOI: 10.1257/jep.20241421
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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