Portfolio Changes and Wealth Inequality Dynamics (new draft coming soon!)
This paper investigates the role of changes in households’ portfolios on the evolution of wealth inequality. First, I show that US households’ portfolio composition has changed between 1989 and 2019. Using an accounting exercise, I quantify that these changes account for 2.4 p.p. of the total 7.8 p.p. increase in the wealth share of the top 1%, mainly due to wealthy households holding a rising amount of high-risk, high-return assets. Second, I analyse whether these changes in portfolios at the top can be caused by changes in income taxation. With an analytical model I show that when taxes fall households shift their portfolio towards high-risk, high-return assets, magnifying the impact of tax rates on wealth inequality. Third, I develop a quantitative model of households’ savings and portfolio choice and analyse the decrease in US tax rate progressivity since 1975. Allowing households to react by changing their portfolio composition amplifies the impact of taxes on the top 1% wealth share by approximately 20% from 1975 to 2019, and by 25% when in the new steady state.