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  Long Run Wealth Under Progressive Taxation:  The Complete Markets Case

  (joint with Eric Young; currently under review) 

  This paper considers the long-run distribution of capital holdings in a model with complete asset   markets and progressive taxation.  Households are assumed to be heterogeneous in their labor market productivity.  With homogeneous preferences and monotone-increasing marginal tax rates, we prove that agents who are not borrowing-constrained must have the lowest income in the population.  Corollaries of this fact are that capital and labor income must be negatively correlated, which then implies that so must income and wealth.  We then show how to construct models with preference heterogeneity that match the data on income, assets, and hours worked.  Using this model we estimate the consequences of changing the progressivity of the tax code;  we find that the model can produce mobility in wealth but not in income.