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Adverse Selection In Credit Markets and Regressive Profit Taxation

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  • Florian Scheuer

Abstract

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18406.

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Date of creation: Sep 2012
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Publication status: published as Scheuer, Florian, 2013. "Adverse selection in credit markets and regressive profit taxation," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1333-1360.
Handle: RePEc:nbr:nberwo:18406

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why should entrepreneurial income be taxed less progressively than labor income?
    by Economic Logician in Economic Logic on 2012-10-15 14:06:00
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Cited by:
  1. Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Florian Scheuer, 2013. "Entrepreneurial Taxation with Endogenous Entry," NBER Working Papers 19235, National Bureau of Economic Research, Inc.
  3. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.

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