Reduce Wealth Inequality Research Articles

Changes in the Distribution of After‐Tax Wealth in the US: Has Income Tax Policy Increased Wealth Inequality?

AbstractA substantial share of the wealth of Americans is held in tax‐deferred form such as in retirement accounts or as unrealised capital gains. Most data and statistics on assets and wealth are reported on a pre‐tax basis, but pre‐tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well‐being of families. In this paper, we describe the distribution of tax‐deferred assets in the Survey of Consumer Finances (SCF) from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after‐tax net worth. The results of our analysis suggest that, relative to published statistics on pre‐tax net worth, the distribution of after‐tax wealth is slightly less concentrated in the early years of our sample period, but the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long‐term capital gains rate is the primary reason for the muted effectiveness of the current income tax system in reducing wealth inequality.

Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I

Increasing savings rates among households of modest incomes would strengthen their balance sheets and reduce wealth inequality. This paper analyzes one of the largest and most successful efforts to increase the savings of ordinary households in American history. The Liberty Bond drives of World War I persuaded tens of millions of Americans to buy government bonds, which were sold in denominations as low as $50, and could be purchased in installment plans. Using newly collected data on the sales of Liberty Bonds at the county level, we analyze the factors that influenced the degree to which the bond drives were successful. The results highlight the importance of the participation of civil society organizations and local banks in marketing the bonds. We discuss the implications of these findings for the design of modern programs to increase savings.

Changes in the Distribution of After-Tax Wealth: Has Income Tax Policy Increased Wealth Inequality?

A substantial share of the wealth of Americans is held in tax-deferred form such as in retirement accounts or as unrealized capital gains. Most data and statistics on assets and wealth is reported on a pre-tax basis, but pre-tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well-being of families. In this paper, we describe the distribution of tax-deferred assets in the SCF from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after-tax net worth. The results of our analysis suggest that, relative to published statistics on pre-tax net worth, the distribution of after-tax wealth is slightly less concentrated at each point in time and the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long-term capital gains rate is the primary reason for the muted effectiveness of the income tax system in reducing wealth inequality.

Changes in the Distribution of After-Tax Wealth: Has Income Tax Policy Increased Wealth Inequality?

A substantial share of the wealth of Americans is held in tax-deferred form such as in retirement accounts or as unrealized capital gains. Most data and statistics on assets and wealth is reported on a pre-tax basis, but pre-tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well-being of families. In this paper, we describe the distribution of tax-deferred assets in the SCF from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after-tax net worth. The results of our analysis suggest that, relative to published statistics on pre-tax net worth, the distribution of after-tax wealth is slightly less concentrated at each point in time and the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long-term capital gains rate is the primary reason for the muted effectiveness of the income tax system in reducing wealth inequality.

The Pattern of Home Ownership Across Cohorts and its Impact on the Net Wealth Distribution: Empirical Evidence from Germany and the US

In this empirical paper we analyze the link between homeownership across cohorts and the net wealth distribution. In particular we are interested in the effect of the pattern of ownership across cohorts. Given that wealth accumulates over the life-cycle and that owners are wealthier than renters, past tenure choices, affecting today's share of owners for different cohorts, should be related to current wealth levels and inequality. In order to gauge the effect of the ownership structure over cohorts on the distribution of net wealth we impose the homeownership pattern of the US on Germany and ask: What would the net wealth distribution in Germany look like if German households were distributed across tenure status along cohorts the same way as those in the US? Our results indicate that the ownership rate and pattern within cohorts is closely linked to the wealth distribution. Imposing the structure of the US on Germany leads to a large increase in the German median and reduces wealth inequality. We show that some of these effects can be attributed to the difference in ownership shares between old cohorts in Germany and the US as often mentioned in the literature, but this effect appears to be less pronounced than expected. Past tenure choice indeed affects today's net wealth distribution.

Understanding the Distributional Impact of Long‐Run Inflation

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self‐insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare. The results hold when the model is extended to account for capital formation.

Endogenous Growth, the Distribution of Wealth, and Optimal Policy under Incomplete Markets And Idiosyncratic Risk

This paper combines the Aiyagari/Huggett-type standard incomplete markets model with the Arrow/Romer approach to growth to analyze feedback effects between growth and inequality, both endogenously determined in equilibrium. We derive conditions on existence/ nonexistence of balanced growth paths. Major results include that growth, inequality, and risk are positively related in our model, but we also identify a hump-shaped relationship between welfare and risk, indicating a tradeoff relationship between risk-pooling and growth in the determination of welfare. We discuss transitory dynamics and policy implications. A growth policy simultaneously reduces wealth inequality in the economy. The benefits and burdens of the underlying policy are unequally distributed, which raises the issue of politico-economic equilibria. We provide results on majority voting, finding that that the median voter prefers less than optimal subsidies on investment. Interestingly, the society might even vote against a policy providing full insurance against idiosyncratic risk, because welfare losses of lower growth more than offset welfare gains from lower risk.

Endogenous Growth, The Distribution of Wealth, and Optimal Policy Under Incomplete Markets and Idiosyncratic Risk

This paper combines the standard incomplete markets model of uninsurable idiosyncratic risks and borrowing constraints with the Arrow/Romer approach to endogenous growth to analyze the interaction of risk, growth, and inequality, the latter also endogenously determined in equilibrium. We derive conditions on existence and nonexistence of balanced growth paths. Major results include that growth, inequality, and risk are positively related in our model, but we also identify a hump–shaped relationship between welfare and risk, indicating a tradeoff relationship between risk–pooling and growth in the determination of welfare. We employ the prototypical policy implications of the underlying growth model (i.e. subsidizing capital returns) and find that the tax–transfer scheme positively affects growth while simultaneously reducing wealth inequality in the economy. The benefits and burdens of the underlying policy are unequally distributed, which raises the issue of politico–economic equilibria. We provide results on majority voting, finding that that the median voter prefers less than optimal subsidies on investment. Interestingly, the society might even vote against a policy providing full insurance against idiosyncratic risk, because welfare losses of lower growth more than offset welfare gains from lower risk

Understanding the Distributional Impact of Long-Run Inflation

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self-insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare. The results hold when the model is extended to account for capital formation.

An Empirical Analysis of Wealth Taxation: Equity vs.Tax Compliance

Capital taxation is currently under debate, basically due to problems of administrative control and proper assessment of the levied assets. We analyze both problems focusing on a capital tax, the annual wealth tax (WT), which is only applied in five OECD countries, being Spain one of them. We concentrate our analysis on top 1% adult population, which permits us to describe the evolution of wealth concentration in Spain along 1983-2001. On average top 1% holds about 18% of total wealth, which rises to 19% when tax incompliance and under-assessment is corrected for housing, the main asset. The evolution suggests wealth concentration has risen. Regarding WT, we analyze whether it helps to reduce wealth inequality or, on the contrary, it reinforces vertical inequity (due to especial concessions) and horizontal inequity (due to the de iure and to de facto different treatment of assets). We analyze in detail housing and equity shares. By means of a time series analysis, we relate the reported values with reasonable price indicators and proxies of the propensity to save. We infer net tax compliance is extremely low, which includes both what we commonly understand by (gross) tax compliance and the degree of under-assessment due to fiscal legislation (for housing). That is especially true for housing, whose level of net tax compliance is well below 50%. Hence, we corroborate the difficulties in taxing capital, and so cast doubts on the current role of the WT in Spain in reducing wealth inequality.

The Distribution of Wealth and Fiscal Policy in Economies With Finitely Lived Agents

We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.

Inégalité de patrimoine et progressivité de l'impôt

On se propose d’analyser l’impact de la progressivité de l’impôt sur le revenu et sur les successions sur l’inégalité de patrimoine en France. En passant à une proportionnalité de chaque type d’impôt, on révèle que la progressivité de l’impôt sur le revenu permet de réduire davantage l’inégalité de patrimoine. La progressivité de l’impôt sur le revenu réduit le risque de revenu. L’épargne de précaution des plus riches se réduit et l’inégalité de patrimoine diminue. En revanche, la progressivité de l’impôt sur les successions modifie peu le risque de revenu. En outre, la progressivité de l’impôt sur les successions s’avère inefficace pour réduire l’inégalité de revenu à la différence de la progressivité de l’impôt sur le revenu.

Repealing the Estate Tax: A Recipe for More Inequality?

The federal government's most effective tool for reducing wealth inequality is the estate tax, but the tax is being phased out. The costs of this repeal are high for all families, rich and poor.

Innovation in social policy: collaborative policy advocacy.

In a time of policy devolution, social workers have a unique opportunity to develop a significant voice in constructing state social welfare policy. This article examines a method of collaborative policy advocacy led by social work researchers, practitioners, advocates, and students. It is illustrated with a five-year project to reduce wealth inequality through community economic development. Researchers brought expertise in ideas and analysis to real-world applications. Social work practitioners brought essential "on the ground" expertise. Students brought much-needed assistance and a fresh perspective to the social policy process. Advocates, working in social welfare advocacy organizations, bridged these perspectives and provided experience in policy advocacy. Working with coalition partners, social workers successfully placed asset-based community economic development strategies on the state agenda and were instrumental in passage of innovative legislation. The article demonstrates that the policy-making process is open to influence by social workers, especially if they come prepared with innovative and promising ideas about long-standing social issues. Social workers can and should take the lead and become significant actors in state policy development.

Race and Wealth Inequality: The Impact of Racial Differences in Asset Ownership on the Distribution of Household Wealth

What accounts for persistent racial differences in wealth ownership? Previous research has debated the role that differences in asset ownership play in creating and maintaining wealth inequality. I use survey data to model the ownership of seven assets and find that whites are indeed more likely than blacks to buy high-risk, high-return assets. I then use a simulation model to explore the effect that these differences have on the distribution of wealth. I separate the effects of asset ownership from the effects of racial differences in family wealth history, earnings, education, marital behavior, fertility, and other influences on wealth inequality. I find that removing racial differences in asset ownership reduced wealth inequality drastically, but not completely, and that racial differences in educational attainment account for much of the remaining difference. I estimate how changes in historical patterns of portfolio behavior and educational attainment would have reduced inequality, and I explore the implications of these findings for reducing wealth inequality in the future.

Age, Wealth Inequality and Life-Cycle Modelling

Most of the main observed features of the distribution of wealth have been studied in detail. We know much about the possible reasons for the long upper tail of the distribution, the age profile of mean wealth, portfolio composition, changes in the distribution over time, differences between countries, and the very low wealth-holdings observed for some people at all ages (see Davies and Shorrocks, forthcoming). Yet one of the most interesting stylized facts about the distribution of wealth ‐ that wealth inequality follows a pronounced U-shaped age profile ‐ has received hardly any attention and has not been satisfactorily explained. In all countries where data are available, wealth inequality declines at least until middle age, and in almost all datasets it increases from middle age through retirement. The fact that the age profile of wealth inequality is U-shaped contrasts with the behaviour of inequality in earnings, income, and consumption. While inequality in earnings declines for the first five to ten years of the working lifetime, the dominant pattern is that inequality in all three of these variables rises over the lifetime. This is such a strong and well-known empirical regularity that it may have drawn attention away from the finding of a U-shaped profile for wealth inequality. This paper explores alternative possible explanations for the U-shaped age profile of wealth inequality. Aside from satisfying our curiosity, such an investigation may help us understand processes of wealth accumulation better. Deaton and Paxson (1994) obtained valuable insights requiring just that a saving model should predict rising income and consumption inequality over the lifetime. But a satisfactory model must be capable of more. It should predict not only that inequality in income and consumption will rise with age but also that wealth inequality will initially decline with age before rising over the latter portion of the life-cycle. As argued by Friedman (1957), the ability to reproduce the stylized facts of wealth inequality is an important test of models of consumption. The only previous attempt to model a U-shaped age profile of wealth inequality of which I am aware is Shorrocks (1975a). Shorrocks investigated a queuing model of wealth accumulation and illustrated the model through an application to the age profiles of mean wealth and wealth inequality. In his model there are two sources of shocks to wealth at a point in time. One is independent of current wealth, and arises due to earnings innovations. The other is proportional to current wealth (in expected value). The independent shocks act to reduce wealth inequality over time, whereas the proportional shocks do the opposite. Initially