Wealth Inequality: Data and Models

In the United States wealth is highly concentrated and very unequally distributed: the richest 1% hold one third of the total wealth in the economy. Understanding the determinants of wealth inequality is a challenge for many economic models. We summarize some key facts about the wealth distribution and what economic models have been able to explain so far.

Taxation, entrepreneurship, and wealth

Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealth concentration.Taxation

Estate taxation, entrepreneurship, and wealth

We study the effects of abolishing estate taxation in a quantitative and realistic framework that includes the key features that policy makers are worried about: business investment, borrowing constraints, estate transmission, and wealth inequality. We use our model to estimate effective estate taxation. We consider various tax instruments to reestablish fiscal balance when abolishing estate taxation. We find that abolishing estate taxation would not generate large increases in inequality, and would, in some cases, generate increases in aggregate output and capital accumulation. If, however, the resulting revenue shortfall were financed through increased income or consumption taxation, the immensely rich, and the old among those in particular, would experience a welfare gain, at the cost of welfare losses for the vast majority of the population.Taxation ; Wealth

Taxation, entrepreneurship, and wealth

Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealthTaxation ; Wealth

Entrepreneurship, frictions, and wealth

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in the presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.Saving and investment ; Wealth

Wealth inequality: data and models

In the United States wealth is highly concentrated and very unequally distributed: the richest 1% hold one third of the total wealth in the economy. Understanding the determinants of wealth inequality is a challenge for many economic models. We summarize some key facts about the wealth distribution and what economic models have been able to explain so far.Wealth

Entrepreneurship, frictions, and wealth

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non- entrepreneurs. We find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.Loans ; Wealth

Estate Taxation, Entrepreneurship, and Wealth

We study the effects of abolishing estate taxation in a quantitative and realistic framework that includes the key features that policy makers are worried about: business investment, borrowing constraints, estate transmission, and wealth inequality. We use our model to estimate effective estate taxation. We consider various tax instruments to reestablish fiscal balance when abolishing estate taxation. We find that abolishing estate taxation would not generate large increases in inequality, and would, in some cases, generate increases in aggregate output and capital accumulation. If, however, the resulting revenue shortfall were financed through increased income or consumption taxation, the immensely rich, and the old among those in particular, would experience a welfare gain, at the cost of welfare losses for the vast majority of the population.

Taxation, entrepreneurship and wealth

Entrepreneurship is a key determinant of investment, saving, wealth holdings, and wealth inequality. We study the aggregate and the distributional effects of several tax reforms in a model that recognizes the key role played by the entrepreneurs, and that matches very well the extreme degree of wealth inequality observed in the U.S. data. We find that the effects of tax reforms on output and capital formation can be particularly large when they affect the majority of small and medium-size businesses, which face the most severe financial constraints, rather than a small number of big businesses. We show that the consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system seems to insulate most of the businesses from the negative effects of estate taxation thus minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing progressivity of the income tax can generate large increases in output, as this stimulates entrepreneurial savings and capital formation, but at the cost of large increases in wealth concentration.Taxation

Wealth inequality, intergenerational links and estate taxation

Empirical studies have shown that, for many countries, the distribution of wealth is much more concentrated than the one of labor earnings. We do not have yet a satisfactory model that can generate enough concentration in wealth from the one for earnings. I construct a computable general equilibrium model with overlapping generations in which parents and children are linked by bequests and earnings within families. I show that bequests are important to explain the emergence of large estates that characterize the top of the wealth distribution and that the introduction of a bequest motive generates lifetime saving profiles more consistent with the data. Moreover, allowing for earnings persistence within families generates an even more concentrated wealth distribution. A cross-country comparison between the U.S. and Sweden shows that intergenerational linkages are important also in economies where redistribution programs are more prominent and there is less inequality.Wealth