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

  • T. Kirk White

    (Duke University)

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://econwpa.repec.org/eps/mac/papers/0209/0209002.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. Mariacristina De Nardi, 1999. "Wealth inequality, intergenerational links and estate taxation," Working Paper Series WP-99-13, Federal Reserve Bank of Chicago.
  3. Pechman, Joseph A, 1987. "Tax Reform: Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 11-28, Summer.
  4. 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.
  5. 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.
  6. Barro, Robert J. & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," Scholarly Articles 3451298, Harvard University Department of Economics.
  7. Stephenson, E. Frank, 1998. "Average marginal tax rates revisited," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 389-409, April.
  8. 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.
  9. Barro, Robert J & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 56(4), pages 419-52, October.
  10. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  11. 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.
  12. David Domeij & Jonathan Heathcote, 2000. "Capital Versus Labor Taxation with Heterogeneous Agents," Econometric Society World Congress 2000 Contributed Papers 0834, Econometric Society.
  13. Jonathan Heathcote & David Domeij, 2000. "Capital Versus Labor Income Taxation With Heterogeneous Agents," Computing in Economics and Finance 2000 346, Society for Computational Economics.
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