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Top Incomes, Rising Inequality, and Welfare

Author

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  • Kevin J. Lansing
  • Agnieszka Markiewicz

Abstract

We introduce permanently-shifting income shares into a standard growth model with two types of agents. Capital owners represent the top quintile of U.S. households while workers represent the remainder. Our tractable model allows us to exactly replicate the observed U.S. time paths of the top quintile income share, capital’s share of income, and key macroeconomic variables over the period 1970 to 2013. For the baseline simulation, the welfare gain for capital owners is 3.7% of per-period consumption while workers suffer a welfare loss of 1.4%. Using counterfactual simulations, we find that both groups could have achieved gains if redistributive government transfers had increased to around 18% of total output by the year 2013 - somewhat higher than the actual value of around 15% observed in the data.

Suggested Citation

  • Kevin J. Lansing & Agnieszka Markiewicz, 2015. "Top Incomes, Rising Inequality, and Welfare," CESifo Working Paper Series 5517, CESifo.
    • Handle: RePEc:ces:ceswps:_5517
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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