Changes in the Distribution of After-Tax Wealth:
Has Income Tax Policy Increased Wealth
Inequality?
Adam Looney
Kevin Moore
Household Wealth Data and Public Policy Conference
Bank of England and Institute for Fiscal Studies
March 9, 2015
The analysis and conclusions set forth are those of the authors and do not indicate
concurrence by other members of the research staff or the Board of Governors of the
Federal Reserve System.
Motivation
• Wealth inequality is increasing
• Recent focus on the top of the distribution
• Piketty (2014), Saez and Zucman (2014), Wolff (2014), Bricker et al (2014), and
Bricker et al (2015) and many earlier studies use pre-tax wealth
• Substantial share of US household wealth is held in tax-deferred form
• Retirement accounts and unrealized capital gains = 38% of wealth in 2013
• Represents an implicit tax liability for households
• Some wealth not available for consumption
2
Motivation
• Effects of income tax policy on the wealth distribution
• May increase or decrease wealth inequality
• Effects of changes in income tax policy over time
• Not including the estate tax – see Gale et al (2001), Avery and Rendall (2002),
Kopczuk and Saez (2004), Kopczuk (2012), Avery, Grodzicki, and Moore (2013)
• After-tax wealth as a better measure of financial well-being
• Similar to studies that build a more complete measure of income
• Donovan (2015), Armour, Burkhauser, and Larrimore (2014), Burkhauser,
Larrimore and Simon (2012), Burkhauser et al (2012), CBO (2014), and
Smeeding and Thompson (2011) and many earlier studies
3
Preview of results
• Distribution of after-tax wealth is less concentrated than pre-tax
• Inequality is also increasing in the after-tax wealth distribution
• Income tax policy has become less effective in reducing wealth
inequality
• Driven by large reductions in capital gains tax rates over time
• Alternative income tax policies can reduce wealth concentration
• Increase in the tax rate on capital gains
• Wealth inequality still increases between 1989 and 2013
4
Data
• Survey of Consumer Finances (SCF)
• Survey of households sponsored by the Federal Reserve Board
• In cooperation with Department of Treasury
• SCF triennial cross-sectional surveys, 1989-2013
• Sample sizes = 4,000 to 6,500 households
• Dual frame sample design
• Area probability – typical households
• List – oversample wealthy households
• Details on the SCF – Bricker et al. (2014)
5
Measuring wealth in the SCF
• Assets
• Financial assets
•
•
•
•
•
•
Transaction accounts
CDs
Stocks and bonds
Mutual funds
Retirement accounts
Trusts and annuities
• Nonfinancial assets
• Liabilities
• Mortgages
• Installment loans
• Car loans
• Student loans
• Other loans
• Credit card balances
• Lines of credit
• Vehicles
• Houses / other property
• Businesses (privately-held)
6
$650
$210
$600
$190
$550
$170
$500
$450
$150
$400
$130
$350
$110
$300
$90
$250
$200
$70
$150
$50
1989
1992
1995
1998
Mean Pre-Tax Net Worth
2001
Year
2004
2007
2010
Thousands of 2013 dollars
Thousands of 2013 dollars
Mean and median pre-tax wealth
2013
Median Pre-Tax Net Worth
7
Mean pre-tax wealth
by pre-tax wealth percentile
250
Thousands of 2013 dollars
200
150
100
0-89.9
50
0
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
8
Mean pre-tax wealth
by pre-tax wealth percentile
2750
22500
2500
20000
17500
2000
1750
15000
1500
12500
1250
90-98.9
10000
99-100
Thousands of 2013 dollars
Thousands of 2013 dollars
2250
1000
7500
750
500
5000
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
9
Pre-tax wealth shares
by pre-tax wealth percentiles
40
Percent
35
30
0-89.9
90-98.9
99-100
25
20
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
10
Tax-deferred assets
• Tax-deferred retirement accounts
• Plans through current and past employers
• 401(k)s, 403(b)s, other defined-contribution pension plans
• Plans started by an individual
• Individual Retirement Accounts (IRA), Keogh (like an IRA)
• Unrealized capital gains
•
•
•
•
Real estate
Privately-held businesses
Stock and stock mutual funds
Not including the primary residence
• Ownership of tax-deferred assets
• 56% in 2013, peaked at 63% in 2001
11
Ownership of tax-deferred assets
by pre-tax wealth percentiles
100
90
80
Percent
70
60
50
40
30
20
1989
1992
0-89.9 TDR
1995
1998
90-98.9 TDR
2001
Year
99-100 TDR
2004
0-89.9 CG
2007
2010
90-98.9 CG
2013
99-100 CG
12
Share of wealth in tax-deferred retirement
by pre-tax wealth percentiles
30
25
Percent
20
15
10
5
0
1989
1992
1995
0-89.9
1998
2001
Year
90-98.9
2004
2007
2010
2013
99-100
13
Share of wealth in unrealized capital gains
by pre-tax wealth percentiles
50
40
Percent
30
20
10
0
1989
1992
1995
0-89.9
1998
2001
Year
90-98.9
2004
2007
2010
2013
99-100
14
Estimating tax liabilities
• NBER TAXSIM – calculates tax liabilities under federal & state tax laws
• Generate necessary input variables from the SCF data
• Base tax liability = household’s tax liability based on prior year income,
exemptions and deductions
• Tax-deferred tax liability = add tax-deferred retirement assets to wage
income, add unrealized capital gains to long-term capital gains income
• Implicit tax liability = tax-deferred – base
• After-tax wealth = pre-tax wealth minus implicit tax liability
15
Tax rate changes, 1988-2012
50
Percent
40
30
Max LTCGR
Max ITR
20
10
1988
1991
1994
1997
2000
Year
2003
2004
2009
2012
16
Implicit tax liability as a share of wealth
by pre-tax wealth percentiles
16
14
12
Percent
10
8
6
4
2
0
1989
1992
1995
0-89.9
1998
2001
Year
90-98.9
2004
2007
2010
2013
99-100
17
Effective tax rate on tax-deferred assets
by pre-tax wealth percentiles
35
30
Percent
25
20
15
10
1989
1992
1995
0-89.9
1998
90-98.9
2001
Year
2004
99-100
2007
2010
2013
Max LTCGR
18
Mean and median after-tax wealth
$650
$210
$600
Thousands of 2013 dollars
$550
$170
$500
$150
$450
$400
$130
$350
$110
$300
$90
$250
Thousands of 2013 dollars
$190
$70
$200
$150
$50
1989
1992
1995
1998
2001
2004
2007
2010
Mean Pre-Tax Net Worth
Mean After-tax Net Worth
Median Pre-Tax Net Worth
Median After-Tax Net Worth
2013
19
Wealth shares
by pre-tax wealth percentiles
40
Percent
35
30
25
0-89.9
90-98.9
99-100
0-89.9 After-tax
90-98.9 After-tax
99-100 After-tax
20
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
20
Difference in wealth shares (after-tax – pre-tax)
by pre-tax wealth percentiles
2
1.5
0-89.9
Percentage Points
1
90-98.9
99-100
0.5
0
-0.5
-1
-1.5
-2
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
21
The top 1 percent
• Stand out in all parts of the analysis
• Many recent studies focus on groups within the top 1 percent
• Split top 1 percent into two subgroups
• Top 0.1 and remaining 0.9 percent
• Heterogeneity within the top 1 percent
•
•
•
•
Mean wealth in 2013 for top 0.1 = $75 million
Mean wealth in 2013 for rest of top 1 = $13 million
Top 0.1 mean unrealized capital gains = 7 times the rest of the top 1
Mean tax-deferred retirement assets about the same
22
Share of wealth in tax-deferred assets
Top 1 percent
60
50
Percent
40
30
20
10
0
1989
1992
99-99.89 TDR
1995
1998
99-99.89 CG
2001
Year
2004
2007
99.9-100 TDR
2010
2013
99.9-100 CG
23
Effective tax rate on tax-deferred assets
Top 1 percent
40
Percent
30
20
10
1989
1992
1995
99-99.89
1998
2001
Year
99.9-100
2004
2007
2010
2013
Max LTCGR
24
Difference in wealth shares (after-tax – pre-tax)
Top 1 percent
0.4
99-99.89
99.9-100
0.2
Percentage Points
0
-0.2
-0.4
-0.6
-0.8
-1
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
25
Alternative tax policy
• Why the differential in wage vs. capital gains rates?
• “Lock-in” effect of high capital gains tax rates
• Spur economic growth with lower tax rates
• Unrealized capital gains taxed at wage income rates
• Treated the same as tax-deferred retirement accounts
• Estimate alternative tax liability
• Implicit tax liability = alternative – base
• After-tax wealth = pre-tax wealth minus implicit tax liability
26
Effective tax rates on tax-deferred assets
Alternative tax policy
45
40
Percent
35
30
25
20
15
1989
0-89.9
1992
90-98.9
1995
1998
99-100
2001
Year
2004
0-89.9 Alt
2007
90-98.9 Alt
2010
2013
99-100 Alt
27
Wealth shares
Alternative tax policy
40
Percent
35
30
25
0-89.9
90-98.9
99-100
0-89.9 Alt
90-98.9 Alt
99-100 Alt
20
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
28
Difference in wealth shares (after-tax – pre-tax)
Alternative tax policy
3
0-89.9
2.5
90-98.9
99-100
2
Percentage Points
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
1989
1992
1995
1998
2001
Year
2004
2007
2010
2013
29
Conclusions
• We provide new estimates of the after-tax distribution of wealth
• Distribution of after-tax wealth is less concentrated than pre-tax
• Effectiveness of income tax policy in reducing inequality has declined
• Combination of substantial decline in capital gains tax rates and large share of
unrealized gains in wealth at the top of the wealth distribution
• Effect is magnified within the top 1 percent
• Top 0.1 experienced largest declines in effective tax rates on tax-deferred assets
• Our alternative tax policy does reduce wealth concentration
• Wealth inequality still increases between 1989 and 2013
• Adverse effect of income tax policies on wealth inequality
30
Thank you
Questions?
kevin.b.moore@frb.gov
31
Ownership of defined-benefit and defined
contribution plans
60
Percent
50
40
30
20
1989
1992
1995
1998
Defined-benefit plan
2001
Year
2004
2007
2010
2013
Defined-contribution plan
32