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Capital Taxation and Investment : Matching 100 Years of Wealth Inequality Dynamics

Boehl, Gregor and Fischer, Thomas LU (2017) In Working Papers 2017(8).
Abstract
Using a parsimonious, analytically tractable dynamic model, we are able to explain up to 100 years of the available data on the dynamics of top-wealth shares for several countries. We build a micro-founded model of heterogeneous agents in which - in addition to stochastic returns on investment - individuals disagree marginally on their expectations of future returns and thus hold different asset positions. We show that, given a positive tax on capital gains, the distribution converges to a double Pareto distribution for which the degree of wealth inequality decreases with the tax rate. Closed-form solutions confirm that without government intervention there is infinite inequality. Moreover, transition dynamics are shown to increase with... (More)
Using a parsimonious, analytically tractable dynamic model, we are able to explain up to 100 years of the available data on the dynamics of top-wealth shares for several countries. We build a micro-founded model of heterogeneous agents in which - in addition to stochastic returns on investment - individuals disagree marginally on their expectations of future returns and thus hold different asset positions. We show that, given a positive tax on capital gains, the distribution converges to a double Pareto distribution for which the degree of wealth inequality decreases with the tax rate. Closed-form solutions confirm that without government intervention there is infinite inequality. Moreover, transition dynamics are shown to increase with the tax rate. We discuss the model's ability to match the measured wealth inequality for the US, the UK, Sweden, and France, both in levels and transitions. The heterogeneous development in the different countries and across time can be traced back to different tax regimes. (Less)
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author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
wealth inequality, capital taxation, stochastic simulation, heterogeneity, D31, H23, C63, G11
in
Working Papers
volume
2017
issue
8
pages
34 pages
publisher
Department of Economics, Lund University
language
English
LU publication?
yes
id
cf1e4ad5-1e35-4d68-b760-f493b24e0687
date added to LUP
2017-06-07 15:47:28
date last changed
2017-06-07 15:47:28
@misc{cf1e4ad5-1e35-4d68-b760-f493b24e0687,
  abstract     = {Using a parsimonious, analytically tractable dynamic model, we are able to explain up to 100 years of the available data on the dynamics of top-wealth shares for several countries. We build a micro-founded model of heterogeneous agents in which - in addition to stochastic returns on investment - individuals disagree marginally on their expectations of future returns and thus hold different asset positions. We show that, given a positive tax on capital gains, the distribution converges to a double Pareto distribution for which the degree of wealth inequality decreases with the tax rate. Closed-form solutions confirm that without government intervention there is infinite inequality. Moreover, transition dynamics are shown to increase with the tax rate. We discuss the model's ability to match the measured wealth inequality for the US, the UK, Sweden, and France, both in levels and transitions. The heterogeneous development in the different countries and across time can be traced back to different tax regimes.},
  author       = {Boehl, Gregor and Fischer, Thomas},
  keyword      = {wealth inequality,capital taxation,stochastic simulation,heterogeneity,D31,H23,C63,G11},
  language     = {eng},
  month        = {06},
  note         = {Working Paper},
  number       = {8},
  pages        = {34},
  publisher    = {Department of Economics, Lund University },
  series       = {Working Papers},
  title        = {Capital Taxation and Investment : Matching 100 Years of Wealth Inequality Dynamics},
  volume       = {2017},
  year         = {2017},
}