Investment-Specific Technological Change, Taxation and Inequality in the U.S

Pedro Brinca, Joao Duarte, Hans Holter and João Gouveia-Oliveira

MPRA Paper from University Library of Munich, Germany

Abstract: Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%.

Keywords: Income Inequality; Taxation; Automation (search for similar items in EconPapers)
JEL-codes: E21 H21 J31 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Investment-Specific Technological Change, Taxation and Inequality in the U.S (2019)
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