Research

Abstract:

Most of the wealthiest U.S. households are entrepreneurs earning high returns from their businesses. This paper shows how the distortionary and redistributive effects of top wealth taxation change when, beyond productivity, entrepreneurs' returns capture their firms' market power. I develop a model in which entrepreneurs accumulate wealth investing in their firm, face capital income risk, set markups increasing with firm market share. Consistently with U.S. data, wealthier entrepreneurs operate larger firms and charge higher markups. Hence, the burden of a top wealth tax falls onto the entrepreneurs imposing the largest markups, reducing the aggregate markup and raising the labor share of income accruing to poor workers. I compare the top wealth tax effects to those arising when market power heterogeneity across entrepreneurs is shut down and returns entirely reflect productivity. I impose a progressive wealth tax raising 1\% of GDP on the wealthiest 1\% of households. When market power heterogeneity is neglected, wage losses induced by the tax are overestimated by 1.5 pp and output losses by 1.1 pp. This is because, in the economy with markup heterogeneity, taxed entrepreneurs impose higher markups and thus exhibit lower production and capital elasticities with respect to the tax. 

Abstract:

In this paper, I study how the introduction of a wealth tax imposed on households at the top of the wealth distribution affects their portfolio choices and, consequently, the allocation of capital in the economy, GDP, and GDP growth. To do so, I develop a household portfolio choice model that replicates U.S. households' investment decisions in private equity, public equity, and safe assets. I use this model as a metering device to quantify the effects of wealth taxation on households' investment choices. I find that taxed households reduce their investment in private equity and, to a lesser extent, in public equity, while increasing their holdings of safe assets. As a result, the wealth tax induces a reallocation of capital from private (and, to a smaller extent, public) equity investments toward safe assets. I further document that private equity investments are primarily directed toward highly productive, high-growth sectors. Therefore, the capital reallocation triggered by the wealth tax leads not only to a reduction in the level of GDP but also to a slowdown in GDP growth.