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Income Inequality and Asset Prices under Redistributive Taxation

Lubos Pastor () and Pietro Veronesi

No 10899, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions.

Keywords: asset pricing; entrepreneurship; inequality; redistribution; taxation (search for similar items in EconPapers)
JEL-codes: E24 G12 G18 H23 J24 J31 J38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Date: 2015-10
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Journal Article: Income inequality and asset prices under redistributive taxation (2016) Downloads
Working Paper: Income Inequality and Asset Prices under Redistributive Taxation (2015) Downloads
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