Intergenerational Correlation in Returns, Wealth Inequality, and the Estate Tax

We provide empirical evidence that asset returns are correlated across genera-tions and that this correlation has significant consequences for the distribution of wealth. Using the Panel Study of Income Dynamics and asset price databases, we find that a 10-percentile increase in a father’s wealth return rank is associated with an approximately 3-percentile increase in his child’s corresponding rank. Next, we construct an overlapping-generations model in which dynasties are linked through returns, earnings, and bequests. Our counterfactual experiments show that the intergenerational correlation in returns (ICR) accounts for a significant fraction of top wealth shares and the ICR is an important driver of persistence at the top of the wealth distribution. Thus, incorporating the ICR alters predictions about the aggregate and distributional effects of estate taxation, with important policy implications.