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Marginal Tax Rates and the Tax Reform of 1986: the Long-run Effect on the U.S. Wealth Distribution

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  • T. Kirk White

    (Duke University)

Abstract

I investigate the effects of the Tax Reform Act of 1986 on the U.S. wealth distribution in a model in which heterogeneous agents face idiosyncratic labor income risk and hold only one asset. The model's stochastic process for earnings is consistent with estimates from panel data. I calibrate the model to match the U.S. wealth distribution and the progressive U.S. income tax structure in 1984. Then, using the same earnings process, I compute the equilibrium with the post-reform income tax structure of 1989. The reform increases the after-tax return to savings more for wealthy households than for wealth-poor households. As a result, I find that the tax reform can account for all of the increase in wealth inequality observed in the data.

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File URL: http://128.118.178.162/eps/mac/papers/0209/0209002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0209002.

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Length: 28 pages
Date of creation: 10 Sep 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0209002

Note: Type of Document - pdf; prepared on Macintosh/LaTeX; to print on Postscript; pages: 28; figures: request from author
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Web page: http://128.118.178.162

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Keywords: Inequality Tax-Reform Wealth-Distribution;

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  1. Mariacristina De Nardi, 1999. "Wealth inequality, intergenerational links and estate taxation," Working Paper Series WP-99-13, Federal Reserve Bank of Chicago.
  2. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-66, October.
  3. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  4. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  5. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  6. Stephenson, E. Frank, 1998. "Average marginal tax rates revisited," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 389-409, April.
  7. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," NBER Working Papers 1060, National Bureau of Economic Research, Inc.
  8. Jonathan Heathcote & David Domeij, 2000. "Capital Versus Labor Income Taxation With Heterogeneous Agents," Computing in Economics and Finance 2000 346, Society for Computational Economics.
  9. David Altig & Charles T. Carlstrom, 1996. "Marginal tax rates and income inequality in a life-cycle model," Working Paper 9621, Federal Reserve Bank of Cleveland.
  10. David Domeij & Jonathan Heathcote, 2000. "Capital Versus Labor Taxation with Heterogeneous Agents," Econometric Society World Congress 2000 Contributed Papers 0834, Econometric Society.
  11. Pechman, Joseph A, 1987. "Tax Reform: Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 11-28, Summer.
  12. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  13. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
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