Changes in the Distribution of After-Tax Wealth: 

Has Income Tax Policy Increased Wealth 

Inequality?

December 3, 2015

Adam Looney

Kevin Moore

The analysis and conclusions set forth are those of the authors and do not indicate 

concurrence by other members of the research staff or the Board of Governors of the 

Federal Reserve System. 
Motivation

• Wealth inequality is increasing 

• Recent focus on the top of the distribution

• Piketty (2014), Saez and Zucman (2014), Wolff (2014), Bricker et al (2014), and 

Bricker et al (2015) and many earlier studies use pre-tax wealth

• Substantial share of US household wealth is held in tax-deferred form

• Retirement accounts and unrealized capital gains = 38% of wealth in 2013

• Represents an implicit tax liability for households

• Some wealth not available for consumption

2
Motivation

• Effects of income tax policy on the wealth distribution

• May increase or decrease wealth inequality

• Effects of changes in income tax policy over time

• Not including the estate tax – see Gale et al (2001), Avery and Rendall (2002), 

Kopczuk and Saez (2004), Kopczuk (2012), Avery, Grodzicki, and Moore (2013)

• After-tax wealth as a better measure of financial well-being

• Similar to studies that build a more complete measure of income

• Donovan (2015), Armour, Burkhauser, and Larrimore (2014), Burkhauser, 

Larrimore and Simon (2012), Burkhauser et al (2012), CBO (2014), and 

Smeeding and Thompson (2011) and many earlier studies

3
Data

• Survey of Consumer Finances (SCF)

• Survey of households sponsored by the Federal Reserve Board

• In cooperation with Department of Treasury

• SCF triennial cross-sectional surveys, 1989-2013

• Sample sizes = 4,000 to 6,500 households

• Dual frame sample design

• Area probability – typical households

• List – oversample wealthy households

• Details on the SCF – Bricker et al. (2014)

4
Measuring wealth in the SCF

• Assets

• Financial assets

• Transaction accounts

• CDs

• Stocks and bonds

• Mutual funds

• Retirement accounts

• Trusts and annuities

• Nonfinancial assets

• Vehicles

• Houses / other property

• Businesses (privately-held)

• Liabilities

• Mortgages

• Installment loans

• Car loans

• Student loans

• Other loans

• Credit card balances

• Lines of credit

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Mean and median pre-tax wealth

 $50

 $70

 $90

 $110

 $130

 $150

 $170

 $190

 $210

 $150

 $200

 $250

 $300

 $350

 $400

 $450

 $500

 $550

 $600

 $650

1989 1992 1995 1998 2001 2004 2007 2010 2013

Thousands of 2013 dollarsThousands of 2013 dollars

Year

Mean Pre-Tax Net Worth Median Pre-Tax Net Worth

6
Mean pre-tax wealth

by pre-tax wealth percentile

0

50

100

150

200

250

1989 1992 1995 1998 2001 2004 2007 2010 2013

Thousands of 2013 dollars

Year

0-89.9

7
Mean pre-tax wealth

by pre-tax wealth percentile

5000

7500

10000

12500

15000

17500

20000

22500

500

750

1000

1250

1500

1750

2000

2250

2500

2750

1989 1992 1995 1998 2001 2004 2007 2010 2013

Thousands of 2013 dollarsThousands of 2013 dollars

Year

90-98.9 99-100

8
Pre-tax wealth shares

by pre-tax wealth percentiles

20

25

30

35

40

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

9
Tax-deferred assets

• Tax-deferred retirement accounts

• Plans through current and past employers

• 401(k)s, 403(b)s, other defined-contribution pension plans

• Plans started by an individual

• Individual Retirement Accounts (IRA), Keogh (like an IRA)

• Unrealized capital gains

• Real estate 

• Privately-held businesses

• Stock and stock mutual funds

• Not including the primary residence

• Ownership of tax-deferred assets

• 56% in 2013, peaked at 63% in 2001

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Ownership of tax-deferred assets

by pre-tax wealth percentiles

20

30

40

50

60

70

80

90

100

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 TDR 90-98.9 TDR 99-100 TDR 0-89.9 CG 90-98.9 CG 99-100 CG

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Share of wealth in tax-deferred retirement

by pre-tax wealth percentiles

0

5

10

15

20

25

30

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

12
Ownership of defined-benefit and defined 

contribution plans

20

30

40

50

60

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

Defined-benefit plan Defined-contribution plan

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Share of wealth in unrealized capital gains

by pre-tax wealth percentiles

0

10

20

30

40

50

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

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Estimating tax liabilities

• NBER TAXSIM – calculates tax liabilities under federal & state tax laws

• Generate necessary input variables from the SCF data

• Base tax liability = household’s tax liability based on prior year income, 

exemptions and deductions 

• Tax-deferred tax liability = add tax-deferred retirement assets to wage 

income, add unrealized capital gains to long-term capital gains income

• Implicit tax liability = tax-deferred – base

• After-tax wealth = pre-tax wealth minus implicit tax liability

15
Tax rate changes, 1988-2012

10

20

30

40

50

1988 1991 1994 1997 2000 2003 2004 2009 2012

Percent

Year

Max LTCGR

Max ITR

16
Implicit tax liability as a share of wealth

by pre-tax wealth percentiles

0

2

4

6

8

10

12

14

16

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

17
Effective tax rate on tax-deferred assets

by pre-tax wealth percentiles

10

15

20

25

30

35

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100 Max LTCGR

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Mean and median after-tax wealth

 $50

 $70

 $90

 $110

 $130

 $150

 $170

 $190

 $210

 $150

 $200

 $250

 $300

 $350

 $400

 $450

 $500

 $550

 $600

 $650

1989 1992 1995 1998 2001 2004 2007 2010 2013

Thousands of 2013 dollarsThousands of 2013 dollars

Mean Pre-Tax Net Worth Mean After-tax Net Worth

Median Pre-Tax Net Worth Median After-Tax Net Worth

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Wealth shares

by pre-tax wealth percentiles

20

25

30

35

40

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

0-89.9 After-tax 90-98.9 After-tax 99-100 After-tax

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Difference in wealth shares (after-tax – pre-tax)

by pre-tax wealth percentiles 

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percentage Points

Year

0-89.9 90-98.9 99-100

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The top 1 percent

• Stand out in all parts of the analysis

• Many recent studies focus on groups within the top 1 percent

• Split top 1 percent into two subgroups

• Top 0.1 and remaining 0.9 percent

• Heterogeneity within the top 1 percent

• Mean wealth in 2013 for top 0.1 = $75 million

• Mean wealth in 2013 for rest of top 1 = $13 million

• Top 0.1 mean unrealized capital gains = 7 times the rest of the top 1

• Mean tax-deferred retirement assets about the same

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Share of wealth in tax-deferred assets

Top 1 percent

0

10

20

30

40

50

60

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

99-99.89 TDR 99-99.89 CG 99.9-100 TDR 99.9-100 CG

23
Effective tax rate on tax-deferred assets

Top 1 percent

10

20

30

40

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

99-99.89 99.9-100 Max LTCGR

24
Difference in wealth shares (after-tax – pre-tax)

Top 1 percent

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percentage Points

Year

99-99.89 99.9-100

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Alternative tax policy

• Why the differential in wage vs. capital gains rates?

• “Lock-in” effect of high capital gains tax rates

• Spur economic growth with lower tax rates

• Unrealized capital gains taxed at wage income rates

• Treated the same as tax-deferred retirement accounts

• Estimate alternative tax liability

• Implicit tax liability = alternative – base

• After-tax wealth = pre-tax wealth minus implicit tax liability

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Effective tax rates on tax-deferred assets

Alternative tax policy

15

20

25

30

35

40

45

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100 0-89.9 Alt 90-98.9 Alt 99-100 Alt

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Wealth shares

Alternative tax policy

20

25

30

35

40

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percent

Year

0-89.9 90-98.9 99-100

0-89.9 Alt 90-98.9 Alt 99-100 Alt

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Difference in wealth shares (after-tax – pre-tax)

Alternative tax policy

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

1989 1992 1995 1998 2001 2004 2007 2010 2013

Percentage Points

Year

0-89.9 90-98.9 99-100

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Conclusions

• We provide new estimates of the after-tax distribution of wealth

• Distribution of after-tax wealth is less concentrated than pre-tax 

wealth early in our sample

• Effectiveness of income tax policy in reducing inequality has declined

• Combination of substantial decline in capital gains tax rates and large share of 

unrealized gains in wealth at the top of the wealth distribution

• Effect is magnified within the top 1 percent

• Top 0.1 experienced largest declines in effective tax rates on tax-deferred assets

• Our alternative tax policy does reduce wealth concentration

• Wealth inequality still increases between 1989 and 2013

• Adverse effect of income tax policies on wealth inequality

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Thank you

Questions?

kevin.b.moore@frb.gov

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