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

Citation Type: Working Paper

Publication Year: 2019

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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%.

Url: https://mpra.ub.uni-muenchen.de/91463/1/MPRA_paper_91463.pdf

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Authors: Brinca, Pedro; Oliveira, Joao; Duarte, Joao

Series Title: MPRA Paper Series

Publication Number: 91463

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Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure, Other

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