MACRO: Markups, Taxes, and Rising Inequality; Professor Stéphane Auray (Université du Littoral Côte d’Opale)

Abstract

We analyze income and wealth inequality dynamics through the lens of an heterogeneous agent model with three key features: (i) an explicit link between firms’ markups and top income shares, (ii) a granular representation of the tax and transfer system, and (iii) three assets with endogenous portfolio decisions. Using counterfactual analyzes, we look at how changes in markups, taxes, factor productivity, and asset prices affected inequalities between 1984 and 2018 in France. Rising markups account for the bulk of rising pretax income inequality. The drivers of rising wealth inequality are more complex. Rising markups and changes in taxes contribute to raise wealth inequality by increasing pretax income inequality and inequality in saving rates between wealth groups. Asset prices – the boom in housing prices – mechanically redistribute wealth from top and bottom wealth groups to the upper middle wealth group, whose wealth is mostly held in the form of housing but are partly offset by a rise in saving rates of top wealth groups. Our results highlight the key role of endogenous saving decisions in response to exogenous variables as a key driver of wealth inequality.

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