IMF Research Perspectives Spring-Summer 2020


IMF Research Perspectives Spring-Summer 2020

Davide Malacrino

Wealth distribution is extremely concentrated in most countries. According to Saez and Zucman (2016), in 2012 the top 0.1 percent richest Americans held more than one-ffth of the economy’s net worth, the highest share since the mid-1920s. A recent and growing body of research suggests that the wealthiest individuals both have disproportionately more wealth and receive higher returns from investing it.

In a recent paper,1 IMF economist Davide Malacrino and coauthors Andreas Fagereng, Luigi Guiso, and Luigi Pistaferri show that returns are positively correlated with individuals’ wealth. They are also heterogeneous, persistent, and correlated across generations.

These findings are based on 12 years of tax records on the wealth and capital income of all taxpayers in Norway from 2004 to 2015. These exhaustive records are available in Norway because of a wealth tax that requires assets to be reported—often by employers, banks, or other third parties, thereby reducing errors that arise from self-reporting. Moreover, the data make it possible to match parents with their children, hence offering a valuable opportunity to examine intergenerational patterns in returns to wealth.

Such thorough data on wealth are extremely rare. Even though administrative data on income are available in many countries, it is much less common for authorities to collect data on wealth, given how few countries collect wealth taxes. Because of the lack of direct wealth measurement, researchers have relied on imputation methods to measure inequality. For example, the so-called capitalization approach relies on imputing individual wealth through the capitalization of asset income from tax returns. This is the method adopted by Saez and Zucman in their recent book, The Triumph of Injustice. As pointed out in previous work by Malacrino and his coauthors, measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.

Why do rich people earn high returns? Conventional wisdom suggests that it is because of risk compensation: richer people on average allocate a higher fraction of their assets to risky investments. Their risk exposure is rewarded with higher returns. However, the authors find that there is more to the story. Richer individuals enjoy pure returns to scale on their wealth. Specifically, for a given portfolio allocation, those who are wealthier are more likely to get higher risk-adjusted returns, possibly because they have access to exclusive investment opportunities or better wealth managers (Figure 1).

Figure 1.
Figure 1.

Wealthier Individuals Get Higher Returns (Percent)

Citation: IMF Research Perspectives 2020, 001; 10.5089/9781513551180.053.A005

Source: Fagereng and others (2020).Note: The figure shows the average return to individual financial wealth portfolios adjusted for their volatility for 2005–2015 against the financial wealth percentile in 2004.

Finally, individual characteristics such as financial sophistication, financial information, and entrepreneurial talent are also important. These characteristics, which people tend to retain over time, make the return to wealth persistent. The combination of higher returns for wealthier individuals with the persistence of their higher returns gives rise to a mechanism that makes wealth more concentrated over time as the wealthy get wealthier. This mechanism has been hypothesized in previous theoretical work, but this research is the first to quantify this mechanism and show that it is likely to have empirical significance.

Returns persist over time for the same individual, but do they also persist across generations? The answer is a qualified yes. Like wealth, which has a high degree of intergenerational correlation—children of wealthy families are likely to have a lot of wealth as adults—returns to wealth are also correlated intergenerationally. But there are important differences in how wealth returns accrue across generations. Returns to wealth display some degree of mean reversion: the children of the richest are likely to be very rich but unlikely to get as high returns from this wealth as their parents did. This suggests that while money is perfectly inheritable, exceptional talent is not.

These results shed new light on the recent debate on wealth taxation. In the presence of heterogeneous returns, a wealth tax could be more efficient than a capital income tax. Using wealth instead of capital income as a tax base would reduce the burden on high-return investments and may motivate taxpayers to direct their savings toward more productive investment. This could benefit society via positive effects on employment and firm creation. Incidentally, the introduction of a wealth tax would also provide more precise data on wealth, which could help explain the dynamics of inequality, its roots, and its relationship with other economic phenomena.


Andreas Fagereng, Luigi Guiso, Davide Malacrino and Luigi Pistaferri. 2020. “Heterogeneity and Persistence in Returns to Wealth.” Econometrica 88 (1): 115–70.