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Taxation of Top Incomes and Tax Avoidance

Author

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  • Scholl, Almuth
  • Di Nola, Alessandro
  • Kocharakov, Georgi
  • Tkhir, Anna-Mariia
  • Wang, Haomin

Abstract

This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance lowers productive efficiency, generates sizable welfare losses, and reduces the effectiveness of the top marginal tax rate at lowering inequality. Tax avoidance reduces the optimal top marginal income tax rate from 47 % to 43 %.

Suggested Citation

  • Scholl, Almuth & Di Nola, Alessandro & Kocharakov, Georgi & Tkhir, Anna-Mariia & Wang, Haomin, 2023. "Taxation of Top Incomes and Tax Avoidance," CEPR Discussion Papers 17970, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17970
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    Keywords

    Tax avoidance;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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