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Entrepreneurship, Inequality, and Taxation

  • Césaire Assah Meh

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-14.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-14.

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Length: 56 pages Abstract: This paper confirms the conjecture that the evaluation of tax policy leads to very different conclusions once the role of entrepreneurs is considered. Contrary to previous literature, the author finds that switching from a progressive to a proportional income tax system has a negligible effect on wealth inequality in the United States. This surprising result arises because entrepreneurial activities moderate the effects of the policy change on the wealth distribution. The author shows that proportional income tax reform increases entrepreneurial investment and savings by reducing the marginal income tax rates paid by entrepreneurs. Within the model, an increase in business investment implies a higher demand for labour, which raises the wage rate of workers and drives down the average return to entrepreneurial activities. This general-equilibrium feedback narrows the income and savings gap between workers and entrepreneurs, and, in turn, leads to a reduction in income and wealth inequality. While the elimination of progressive income taxation increases entrepreneurial investments, it has almost no effect on the number of entrepreneurs, as the costs of entrepreneurial activities rise with increasing wages. The model is also able to account for the substantial share of income and wealth held by entrepreneurs, the high savings rate of entrepreneurs relative to workers, and the high concentration of wealth observed in the data.
Date of creation: 2002
Date of revision:
Handle: RePEc:bca:bocawp:02-14
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  18. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  19. Poterba, James M., 1998. "The rate of return to corporate capital and factor shares: new estimates using revised national income accounts and capital stock data," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 211-246, June.
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