Using Forbes 400 data together with historical data on tax rates and macroeconomic indicators, we study the relationship between the maximum marginal income tax rate and wealth inequality. We find through a novel tail regression model that a higher maximum tax rate is associated with a higher wealth Pareto exponent . Setting the maximum  rate to 0.30-0.40 (as in U.S. currently) leads to an exponent of 1.5-1.8, while counterfactually setting it to 0.8 (as suggested by Piketty, 2014) would lead to an exponent of 2.6. We present a simple economic model that explains these findings and discuss the welfare implications of taxation.
Using Forbes 400 data together with historical data on tax rates and macroeconomic indicators, we study the effects of the maximum marginal income tax rate on wealth inequality. To this end, we develop a novel tail regression method, which accommodates the unique feature that the data are truncated from below at the 400th order statistic. Applying this tail regression to the "natural experiment" (Feldstein, 1995) of the event that tax rates rapidly declined in the 1980s, we find that higher maximum marginal income tax rates induce higher Pareto exponents of the wealth distribution . Setting the maximum tax rate to 0.30-0.40 (as in U.S. currently) leads to a Pareto exponent of 1.5-1.8, while counterfactually setting it to 0.80 (as suggested by Piketty, 2014) would lead to a Pareto exponent of 2.6. We present a simple economic model that explains these findings and discuss the welfare implications of taxation.
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