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

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.

Keywords: Inequality; Tax-Reform; Wealth-Distribution (search for similar items in EconPapers)
JEL-codes: D31 E62 E65 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-pub
Date: Written 2002-09-10
Note: Type of Document - pdf; prepared on Macintosh/LaTeX; to print on Postscript; pages: 28; figures: request from author
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