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The distribution of wealth: an agent-based approach to examine the effect of estate taxation, skill inheritance, and the Carnegie Effect

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Abstract

Wealth inequality has been a topic of recent interest worldwide. One means to address wealth inequality may be through estate taxation. To study the effect of estate taxes on the distribution of wealth, we examine a simple agent-based model where agents live, earn income, die, and pass an inheritance onto the next generation. Taxed estate wealth is then distributed among the population in various ways. We find that estate taxation can be a means of lowering wealth inequality. Furthermore, we examine the effect of skill inheritance and the “Carnegie Effect” on the distribution of wealth. We find that skill inheritance leads to increased inequality in our model, and inclusion of the “Carnegie Effect” (a reduction in labor effort/participation by individuals receiving large bequests) lowers the accumulation of wealth of not only those receiving large bequests but also of low-wealth individuals through a reduction in tax revenue available for redistribution. As such, we show estate taxation up to around 40% increases both efficiency (total wealth) and wealth equity in the modeled economy by encouraging work effort and generating revenue for greater redistribution.

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Data availability

The data sets generated and analyzed during the current study are available from the corresponding author on reasonable request.

Notes

  1. One notable alternative to the Gini coefficient is the Kolkata-index (k-index, see Chatterjee et al. (2017), Banerjee et al. (2020a), and Banerjee et al. (2020b)), which is also based on the Lorenz function. We explored using the k-index and found that it yields very similar results to using the Gini coefficient. For brevity, these results are not reported in this paper.

  2. Wealth percentiles provided by the “Net Worth Percentile Calculator for the United States” at dqydj.com based on the Fed 2019 Survey of Consumer Finance.

  3. Similar to Table 1, these percentiles are not necessarily those of inheritable wealth, but do provide a reasonable structure for a progressive tax for our model.

  4. The random fluctuations are a result of the wealth-earning process which contains a random component.

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Acknowledgements

The authors would like to thank Priktish Rao Suntoo for research assistance and two anonymous reviewers for their valuable insight.

Funding

One of the authors (Velardi) was supported by the Lycoming College Joanne and Arthur Haberberger Fellowship Program.

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Authors and Affiliations

  1. Department of Astronomy and Physics, Lycoming College, Williamsport, Pennsylvania, 17701, USA

    Christopher W. Kulp & Matthew Velardi

  2. Department of Economics, Lycoming College, Williamsport, Pennsylvania, 17701, USA

    Michael Kurtz & Charles Hunt

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  1. Christopher W. Kulp
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  2. Michael Kurtz
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  4. Matthew Velardi
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Correspondence to Michael Kurtz.

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Kulp, C.W., Kurtz, M., Hunt, C. et al. The distribution of wealth: an agent-based approach to examine the effect of estate taxation, skill inheritance, and the Carnegie Effect. J Econ Interact Coord 18, 397–415 (2023). https://doi.org/10.1007/s11403-022-00372-7

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