Marginal Tax Rates and Income Inequality in a Life-Cycle Model

42 Pages Posted: 17 Jan 2015

See all articles by David Altig

David Altig

Federal Reserve Banks - Federal Reserve Bank of Atlanta; Federal Reserve Bank of Cleveland; University of Chicago - Booth School of Business

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Date Written: December 1, 1996

Abstract

In this paper, we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on previous simulation models developed by Auerbach and Kotlikoff and Fullerton and Rogers, and uses an algorithm that allows us to examine marginal tax rate structures in their literal form. We find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our baseline experiments, the change in steady-state income inequality under 1989 U.S. income tax rates vis-à-vis 1984 rates is about half as large as the change actually seen in the data over those two years, when measured in terms of a monetary metric derived from Gini coefficients.

Suggested Citation

Altig, David and Carlstrom, Charles T., Marginal Tax Rates and Income Inequality in a Life-Cycle Model (December 1, 1996). FRB of Cleveland Working Paper No. 9621. Available at SSRN: https://ssrn.com/abstract=2550327 or http://dx.doi.org/10.2139/ssrn.2550327

David Altig

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216-579-2041 (Phone)

University of Chicago - Booth School of Business

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

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