How does the middle class vanish? The importance of redistribution targets

The aggregate income share of middle-class households is observed to be shrinking in some developed countries. The cause of the disappearance of the middle class needs further investigation. We are aware of Piketty's hypothesis that inequality increases if the rate of return on capital exceeds the economic growth rate. However, increasing inequality is not identical to the vanishing middle class, and the macroeconomic mechanism for the latter is yet to be investigated. This study analyses the mechanism by which the middle class vanishes by constructing a wealth-in-the-utility-function model. Our findings are as follows: (1) If a modified Piketty condition is combined with a lower-class targeted redistribution, the middle class vanishes through the vicious cycle of expansion of the lower class and increasing taxes. (2) An institutional conversion to a universal redistribution can prevent the middle class from vanishing, even if the modified Piketty condition holds. & COPY; 2023 Economic Society of Australia, Queensland. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).