Income Inequality and Asset Prices Under Redistributive Taxation

40 Pages Posted: 26 Oct 2015 Last revised: 17 Mar 2023

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: October 2015

Abstract

Our simple model features agents heterogeneous in skill and risk aversion, incomplete financial markets, and redistributive taxation. 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 equity risk premium. Both income inequality and 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 supports the model’s predictions.

Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Income Inequality and Asset Prices Under Redistributive Taxation (October 2015). NBER Working Paper No. w21668, Available at SSRN: https://ssrn.com/abstract=2679707

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Pietro Veronesi

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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