In a long-term research project, economists Linus Mattauch, David Klenert, Joseph E. Stiglitz and Ottmar Edenhofer have shown that taxing capital to fund public investment can reduce wealth inequality without hampering economic growth. Politically, this result has huge explosive power considering that the Covid-19 pandemic has further worsened inequality levels that have been on a rise within major economies around the world in the past few decades anyway (Chancel et al., 2021). This inequality is most pronounced when it comes to wealth levels. However, mainstream economics has traditionally cautioned against taxing capital to reduce inequality rates as this was assumed to hamper economic growth (as wealth is considered productive capital) and thus, through lower investment rates, reduce prosperity.

New research by a group around nobel laureate Joseph Stiglitz now shows that there are better ways to think about capital taxation, showing that wealth taxes can be designed to reduce wealth disparities and increase efficiency and prosperity at the same time – especially when used for financing public investment, which is severely under-funded in rich countries.

In the study, the authors consider disparities in saving behavior in a novel way by introducing different wealth groups: dynastic savers and life-cycle savers. They manage to show that, in a scenario where public capital is underfunded, and the elasticity of substitution between labor and capital is moderately high, capital taxes always decrease wealth inequality. The findings are robust for various spending channels, from education to infrastructure. Even for lower elasticities, wealth inequality decreases and the middle class is better off in absolute terms, if capital taxes are designed to be moderately high.

Counteracting hegemonic discourses around wealth inequality, the study shows that there is in fact room for manoeuver to design policies that both respond to inequality and help enable crucial public investments needed to manage the transformation to a climate-neutral economy.

The whole study can be accessed here.