Unpacking Rising Inequality: The Roles of Markups, Taxes, and Asset Prices

Abstract We study the dynamics of income and wealth inequality using a heterogeneous-agent model that combines endogenous portfolio choice, a granular representation of the tax-and-transfer system, and a reduced-form mechanism linking markups to top incomes through entrepreneurial risk. Driven by changes in taxation, markups, and asset prices, the model accounts for the observed trends in income and wealth inequality in France since 1984, up to the top 1% income and wealth shares. We combine counterfactual simulations with a simple accounting decomposition of wealth accumulation to assess the contributions of these driving forces to inequality dynamics and to identify the channels through which they operate. We identify rising markups as the primary driver of income inequality, while all three forces—taxation, markups, and asset prices—contribute significantly to wealth inequality. Our findings highlight both the mechanical impact of differential asset price movements and the central role of endogenous saving responses in shaping wealth inequality over time.