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Adverse selection in credit markets and regressive profit taxation

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  • Scheuer, Florian

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.

Suggested Citation

  • 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:eee:jetheo:v:148:y:2013:i:4:p:1333-1360
    DOI: 10.1016/j.jet.2013.04.010
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Laurence Jacquet & Etienne Lehmann, 2015. "Optimal Income Taxation when Skills and Behavioral Elasticities are Heterogeneous," CESifo Working Paper Series 5265, CESifo Group Munich.
    2. Casey Rothschild & Florian Scheuer, 2016. "Optimal Taxation with Rent-Seeking," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1225-1262.
    3. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-163, May.
    4. Florian Scheuer & Joel Slemrod, 2019. "Taxation and the Superrich," NBER Working Papers 26207, National Bureau of Economic Research, Inc.
    5. Casey Rothschild & Florian Scheuer, 2014. "Optimal Taxation with Rent-Seeking," CESifo Working Paper Series 5071, CESifo Group Munich.
    6. Anastasios Dosis, 2016. "Investment, Adverse Selection and Optimal Redistributive Taxation," Working Papers hal-01285163, HAL.
    7. Dosis, Anastasios, 2016. "Investment, Adverse Selection and Optimal Redistributive Taxation," ESSEC Working Papers WP1605, ESSEC Research Center, ESSEC Business School.
    8. repec:eee:labeco:v:56:y:2019:i:c:p:1-25 is not listed on IDEAS
    9. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. repec:kap:itaxpf:v:26:y:2019:i:5:d:10.1007_s10797-019-09540-1 is not listed on IDEAS
    11. 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.
    12. Diego d’Andria, 2019. "Tax policy and entrepreneurial entry with information asymmetry and learning," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1211-1229, October.
    13. Anastasios Dosis, 2019. "Optimal Redistributive Taxation in Credit Markets with Adverse Selection," Working Papers hal-02130458, HAL.

    More about this item

    Keywords

    Multidimensional screening; Credit markets; Entrepreneurial taxation; Occupational choice;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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