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Entrepreneurial Taxation with Endogenous Entry

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  • Florian Scheuer

Abstract

I analyze the optimal taxation of profits and labor income under endogenous firm formation. Individuals differ in their skill and cost of setting up a firm, and can become workers or entrepreneurs. A tax system in which profits and labor income are subject to the same schedule uses general equilibrium effects through wages to indirectly redistribute across occupations. Optimal policies can involve low tax rates at the top and distortions of firms' input choices. However, these properties disappear under a differential treatment of profits and labor income. Then, redistribution is achieved directly through taxes and production efficiency is always optimal.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 6 (2014)
Issue (Month): 2 (May)
Pages: 126-63

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Handle: RePEc:aea:aejpol:v:6:y:2014:i:2:p:126-63

Note: DOI: 10.1257/pol.6.2.126
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  9. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
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Cited by:
  1. Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.
  2. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
  3. Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
  4. Casey Rothschild, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 623-668.
  5. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers 14-17, University of Mannheim, Department of Economics.

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