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Optimal taxation of entrepreneurial capital with private information

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  • Stefania Albanesi

    ()
    (Department of Economics, Columbia University)

Abstract

This paper studies optimal taxation of entrepreneurial capital with private information and multiple assets. Entrepreneurial activity is subject to a dynamic moral hazard problem and entrepreneurs face idiosyncratic capital risk. We first characterize the optimal allocation subject to the incentive compatibility constraints resulting from the private information. The optimal tax system implements such an allocation as a competitive equilibrium for a given market structure. We consider several market structures that differ in the assets or contracts traded and obtain three novel results. First, differential asset taxation is optimal. Marginal taxes on bonds depend on the correlation of their returns with idiosyncratic capital risk, which determines their hedging value. Entrepreneurial capital always receives a subsidy relative to other assets in the bad states. Second, if entrepreneurs are allowed to sell equity, the optimal tax system embeds a prescription for double taxation of capital income at the firm level and at the investor level. Finally, we show that taxation of assets is essential even with competitive insurance contracts, when entrepreneurial portfolios are also unobserved.

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Bibliographic Info

Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0607-11.

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Length: 40 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:clu:wpaper:0607-11

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  1. Narayana R Kocherlakota, 2005. "Advances in Dynamic Optimal Taxation," Levine's Bibliography 784828000000000518, UCLA Department of Economics.
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  7. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers 4006, C.E.P.R. Discussion Papers.
  8. Bizer, David S. & DeMarzo, Peter M., 1999. "Optimal Incentive Contracts When Agents Can Save, Borrow, and Default," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 241-269, October.
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Cited by:
  1. Tsyvinski, Aleh & Golosov, Mikhail & Farhi, Emmanuel, 2009. "A Theory of Liquidity and Regulation of Financial Intermediation," Scholarly Articles 4481504, Harvard University Department of Economics.
  2. da Costa, Carlos E. & Severo, Tiago, 2008. "Education, preferences for leisure and the optimal income tax schedule," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 113-138, February.
  3. Vasia Panousi & Catarina Reis, 2012. "Optimal capital taxation with idiosyncratic investment risk," Finance and Economics Discussion Series 2012-70, Board of Governors of the Federal Reserve System (U.S.).
  4. Borys Grochulski & Tomasz Piskorski, 2005. "Optimal wealth taxes with risky human capital," Working Paper 05-13, Federal Reserve Bank of Richmond.
  5. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-63, May.
  6. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
  7. Césaire A. Meh & Yaz Terajima, 2009. "Uninsurable Investment Risks and Capital Income Taxation," Working Papers 09-3, Bank of Canada.
  8. Zhang, Yuzhe, 2009. "Dynamic contracting with persistent shocks," Journal of Economic Theory, Elsevier, vol. 144(2), pages 635-675, March.
  9. Vasia Panousi, 2008. "Capital Taxation with Entrepreneurial Risk," 2008 Meeting Papers 36, Society for Economic Dynamics.

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