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Entrepreneurial Taxation with Endogenous Entry

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  • Florian Scheuer

Abstract

This paper analyzes Pareto optimal non-linear taxation of profits and labor income in a private information economy with endogenous firm formation. Individuals differ in both their skill and their cost of setting up a firm, and choose between becoming workers and entrepreneurs. I show that a tax system in which entrepreneurial profits and labor income must be subject to the same non-linear tax schedule makes use of general equilibrium (or "trickle down'') effects through wages to indirectly achieve redistribution between entrepreneurs and workers. As a result, constrained Pareto optimal policies can involve low marginal tax rates at the top and, if available, input taxes that distort the firms' input choices. However, these properties disappear when a differential tax treatment of profits and labor income is possible. In this case, redistribution is achieved directly through the tax system rather than "trickle down'' effects, and production efficiency is always optimal.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19235.

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Date of creation: Jul 2013
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Publication status: published as Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-63, May.
Handle: RePEc:nbr:nberwo:19235

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  1. Cesaire Meh, 2005. "Entrepreneurship, Wealth Inequality, and Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 688-719, July.
  2. Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers, Princeton, Department of Economics - Financial Research Center 129, Princeton, Department of Economics - Financial Research Center.
  3. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  4. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  5. Stefania Albanesi, 2007. "Optimal taxation of entrepreneurial capital with private information," Discussion Papers, Columbia University, Department of Economics 0607-11, Columbia University, Department of Economics.
  6. Scheuer, Florian, 2013. "Adverse selection in credit markets and regressive profit taxation," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(4), pages 1333-1360.
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Citations

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Cited by:
  1. Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
  2. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," STICERD - Public Economics Programme Discussion Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 19, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 6(2), pages 126-63, May.
  4. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers, University of Mannheim, Department of Economics 14-17, University of Mannheim, Department of Economics.
  5. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  6. Juan Carlos Suárez Serrato & Owen Zidar, 2014. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," NBER Working Papers 20289, National Bureau of Economic Research, Inc.
  7. Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.

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