Since the 1980s, the U.S. income distribution has become considerably more concentrated toward the top
while the wealth distribution has not. I argue that this can be accounted for by occupational shifts caused
by the decline in tax progressivity. To show this, I construct a dynamic general equilibrium model of occupational
choice which distinguishes between entrepreneurs, who run their own firms, and managers,
who run publicly owned firms. Collateral constraints induce entrepreneurs to hold more wealth, while
managers earn higher wages as a result of competitive assignments to firms. Feeding observed tax policy
changes from 1970 to 2000 into the model, I find that (i) less progressive taxation increases the relative mass
of managers in equilibrium, and explains approximately 30% of the observed increase in the concentrations
of earnings and income without increasing that of wealth, and (ii) reverting to historical tax policies has
only a negligible impact on consumption equivalent welfare.
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