Daniel R. Carroll

The Demand for Income Tax Progressivity in the Growth Model

This paper examines the degree of income tax progressivity chosen through a simple majority vote in a model with savings. Households have permanent differences with respect to their labor productivity and their discount factors. The government has limited commitment to future policy, so voting is repeated every period. Because the model features mobility within the wealth distribution, the median voter is determined endogenously. In a numerical experiment, the model is initialized to the 1992 U.S. joint distribution of income and wealth as well as several statistics of the federal income tax distribution. Support for a high degree of progressivity is widespread. In the long run, households that vote for lower progressivity have high labor productivity and/or very high wealth. A movement towards greater progressivity increases aggregate capital and income, but it effects only a small decrease in long-run income and wealth inequality.

Long-Run Wealth under Progressive Taxation: The Complete Markets Case ∗

This paper considers the long-run distribution of capital holdings in a model with complete asset markets and progressive taxation. Households are assumed to be heterogeneous in their labor market productivity. With homogeneous preferences and monotone-increasing marginal tax rates, we prove that agents who are not borrowing-constrained must have the lowest income in the population. Corollaries of this fact are that capital and labor income must be negatively correlated, which then implies that so must income and wealth. We then show how to construct models with preference heterogeneity that match the data on income, assets, and hours worked. Using this model we estimate the consequences of changing the progressivity of the tax code; we find that the model can produce mobility in wealth but not in income.

Majority Voting: A Quantitative Investigation

We study the tax systems that arise in a once-and-for-all majority voting equilibrium embedded within a macroeconomic model of inequality. We find that majority voting delivers (i) a small set of outcomes, (ii) zero labor income taxation, and (iii) nearly zero transfers. We find that majority voting, contrary to the literature developed in models without idiosyncratic risk, is quite powerful at restricting outcomes; however, it also delivers predictions inconsistent with observed tax systems.

The Piketty Transition

We study the effects on inequality of a “Piketty transition” to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and the effect is negative. Finally, following Piketty’s thought experiment, we study how the transition might occur without declining returns; here, we find inequality decreases substantially if financial innovation acts to reduce idiosyncratic return risk, and does not change much at all if it acts to increase capital’s share of income.