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Progressive Taxation, Moral Hazard, and Entrepreneurship

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  • Christian Keuschnigg
  • Søren Bo Nielsen

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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Bibliographic 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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Cited by:
  1. Cumming, Douglas J., 2005. "Agency costs, institutions, learning, and taxation in venture capital contracting," Journal of Business Venturing, Elsevier, vol. 20(5), pages 573-622, September.
  2. Hagen, Kare P. & Sannarnes, Jan Gaute, 2007. "Taxation of uncertain business profits, private risk markets and optimal allocation of risk," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1507-1517, August.
  3. Cumming, Douglas & Johan, Sofia Atiqah binti, 2008. "Preplanned exit strategies in venture capital," European Economic Review, Elsevier, Elsevier, vol. 52(7), pages 1209-1241, October.
  4. Hans Bacher & Marius Brülhart, 2013. "Progressive taxes and firm births," International Tax and Public Finance, Springer, Springer, vol. 20(1), pages 129-168, February.
  5. Cumming, Douglas & Schmidt, Daniel & Walz, Uwe, 2010. "Legality and venture capital governance around the world," Journal of Business Venturing, Elsevier, vol. 25(1), pages 54-72, January.
  6. Douglas Cumming, 2010. "Public policy and the creation of active venture capital markets," Venture Capital, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(1), pages 75-94, April.
  7. Keuschnigg, Christian & Nielsen, Soren Bo, 2002. "Start-ups, Venture Capitalists and the Capital Gains Tax," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3263, C.E.P.R. Discussion Papers.
  8. Cumming, Douglas & Li, Dan, 2013. "Public policy, entrepreneurship, and venture capital in the United States," Journal of Corporate Finance, Elsevier, Elsevier, vol. 23(C), pages 345-367.
  9. Ergete Ferede, 2013. "Tax progressivity and self-employment: evidence from Canadian provinces," Small Business Economics, Springer, Springer, vol. 40(1), pages 141-153, January.
  10. Cumming, D. & Johan, S.A., 2005. "Advice and monitoring in venture finance," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2005-003, Tilburg University, Tilburg Law and Economic Center.
  11. 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, Springer, vol. 31(1), pages 59-92, June.
  12. Cumming, D. & Johan, S.A., 2005. "Is it the law or the lawyers? Investment fund covenants," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2005-005, Tilburg University, Tilburg Law and Economic Center.
  13. Douglas Cumming & Sofia Johan, 2009. "Pre-seed government venture capital funds," Journal of International Entrepreneurship, Springer, Springer, vol. 7(1), pages 26-56, March.
  14. Cumming, Douglas & Fleming, Grant & Schwienbacher, Armin, 2006. "Legality and venture capital exits," Journal of Corporate Finance, Elsevier, Elsevier, vol. 12(2), pages 214-245, January.
  15. Cumming, Douglas, 2007. "Government policy towards entrepreneurial finance: Innovation investment funds," Journal of Business Venturing, Elsevier, vol. 22(2), pages 193-235, March.
  16. Douglas Cumming & Sofia Johan, 2010. "Phasing Out an Inefficient Venture Capital Tax Credit," Journal of Industry, Competition and Trade, Springer, Springer, vol. 10(3), pages 227-252, September.

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