Breaking the Dynastic Cycle: Inequality, Taxation, and Redistribution

This paper studies the long-run distributional effects of inheritance taxation and redistribution within an agent-based overlapping-generations model featuring heterogeneous agents who differ in demographics, returns to wealth, education, and consumption behaviour. The results show that progressive inheritance taxation combined with redistribution substantially reduces wealth inequality, while consumption inequality declines more gradually and with a delay. This lag reflects lifecycle dynamics: younger households predominantly save transfers, whereas middle-aged households consume at peak earning stages. Importantly, these policies do not erode aggregate wealth. Instead, they reallocate wealth across households without shrinking the total wealth stock. The top 1% and top 10% experience losses in both wealth shares and absolute wealth levels, while the bottom 50% gain in both dimensions. These effects intensify over time and become particularly pronounced after several decades, as redistribution translates into higher human capital accumulation and improved lifetime earnings for lower-wealth households. Overall, the findings suggest that the conventional equity–efficiency trade-off is significantly weakened when tax revenues operate as a form of pre-distribution rather than mere ex post redistribution. In this framework, the true efficiency loss stems not from taxation, but from the long-run compounding of dynastic wealth concentration under policy inaction.