Sources of US Wealth Inequality: Past, Present, and Future
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This paper employs a benchmark heterogeneous-agent macroeconomic model to examine a number of plausible drivers of the rise in wealth inequality in the US over the last forty years. We find that the significant drop in tax progressivity starting in the late 1970s is the most important driver of the increase in wealth inequality since then. The sharp observed increases in earnings inequality and the falling labor share over the recent decades fall far short of accounting for the data. The model can also account for the dynamics of wealth inequality over the period—in particular the observed U-shape—and here the observed variations in asset returns are key. Returns on assets matter because portfolios of households differ systematically both across and within wealth groups, a feature in our model that also helps us to match, quantitatively, a key long-run feature of wealth and earnings distributions: the former is much more highly concentrated than the latter.
For helpful comments and suggestions the authors would like to thank Chris Carroll, Marty Eichenbaum, Ben Moll, Jim Poterba, Paolo Sodini, Harald Uhlig, Owen Zidar, and seminar participants at the 2015 SED Meetings, the 2015 Hydra Workshop on Dynamic Macroeconomics, the Seventh Meeting of the Society for the Study of Economic Inequality, the 2017 NBER Summer Institute, the 2019 NTA Conference, the 2020 NBER Macroeconomics Annual, Bern, ECB, Johns Hopkins, Indiana, M.I.T., Oslo, Penn State, University of Pennsylvania, SOFI, and Yale.
A previous version of this paper circulated as NBER Working Paper \#23011 under the title ``The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation". The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Krusell is grateful for funding from NORFACE, grant TRISP 462-16-120.