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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.

Suggested Citation

  • T. Kirk White, 2002. "Marginal Tax Rates and the Tax Reform of 1986: the Long-run Effect on the U.S. Wealth Distribution," Macroeconomics 0209002, University Library of Munich, Germany.
    • 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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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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