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Progressive Taxation, Moral Hazard, and Entrepreneurship

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Author Info
Christian Keuschnigg
Søren Bo Nielsen

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Abstract

This paper considers the general equilibrium and welfare effects of a linear progressive income tax with entrepreneurship and moral hazard. A competitive intermediation sector diversifies risk associated with entrepreneurial activity, but full risk consolidation is prevented by moral hazard. Since effort is not observable, risk bearing of entrepreneurs is required for incentive reasons. The extent of risk consolidation is endogenously explained. We find that a nonredistributive tax is neutral. A progressive tax always impairs entrepreneurship while the effect on welfare can be positive or zero, depending on the specification of moral hazard. Some results may also depend on the concrete formulation of preferences. Copyright 2004 Blackwell Publishing Inc..

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Publisher Info
Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 6 (2004)
Issue (Month): 3 (08)
Pages: 471-490
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Handle: RePEc:bla:jpbect:v:6:y:2004:i:3:p:471-490

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  1. Cumming, D. & Johan, S., 2005. "Provincial preferences in private equity," Discussion Paper 04, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  2. Christian Keuschnigg & Soren Bo Nielsen, 2002. "Start-ups, Venture Capitalits, and the Capital Gains Tax," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Douglas Cumming & Daniel Schmidt & Uwe Walz, 2004. "Legality and Venture Governance Around the World," CFS Working Paper Series 2004/17, Center for Financial Studies. [Downloadable!]
  4. Cumming, D. & Johan, S., 2005. "Is it the law or the lawyers? : Investment fund covernants across countries," Discussion Paper 05, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
  5. Cumming, D. & Johan, S., 2005. "Advice and monitoring in venture finance," Discussion Paper 03, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  6. Douglas Cumming & Grant Fleming & Armin Schwienbacher, 2008. "Financial intermediaries, ownership structure and the provision of venture capital to SMEs: evidence from Japan," Small Business Economics, Springer, vol. 31(1), pages 59-92, June. [Downloadable!] (restricted)
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