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Capital taxation with entrepreneurial risk

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  • Vasia Panousi

Abstract

This paper studies the effects of capital taxation in a dynamic heterogeneous-agent economy with uninsurable entrepreneurial risk. Although it allows for rich general-equilibrium effects and a stationary distribution of wealth, the model is highly tractable. This permits a clear analysis, not only of the steady state, but also of the entire transitional dynamics following any change in tax policies. Unlike either the complete-markets paradigm or Bewley-type models where idiosyncratic risk impacts only labor income, here it is shown that capital taxation may actually stimulate capital accumulation. This possibility emerges because of the general-equilibrium effects of the insurance aspect of capital taxation. In particular, for the preferred calibrated version of the model, when the tax on capital is 25 percent, output per work-hour is 2.2 percent higher than it would have been had the tax rate been zero. Turning to the welfare effects of a reform in capital taxation, it is examined how these effects depend on whether one focuses on the steady state or also takes into account transitional dynamics, as well as how they vary in the cross-section of the population (rich versus poor, entrepreneurs versus non-entrepreneurs).

Suggested Citation

  • Vasia Panousi, 2010. "Capital taxation with entrepreneurial risk," Finance and Economics Discussion Series 2010-56, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2010-56
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    References listed on IDEAS

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    1. Yacine Ait-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2001. "Luxury Goods and the Equity Premium," NBER Working Papers 8417, National Bureau of Economic Research, Inc.
    2. repec:bla:jfinan:v:59:y:2004:i:6:p:2959-3004 is not listed on IDEAS
    3. Annette Vissing-Jørgensen & Orazio P. Attanasio, 2003. "Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion," American Economic Review, American Economic Association, vol. 93(2), pages 383-391, May.
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    Cited by:

    1. Angeletos, George-Marios & Panousi, Vasia, 2011. "Financial integration, entrepreneurial risk and global dynamics," Journal of Economic Theory, Elsevier, vol. 146(3), pages 863-896, May.
    2. Bettina Brueggemann, 2016. "Higher Taxes at the Top: The Role of Entrepreneurs," 2016 Meeting Papers 332, Society for Economic Dynamics.
    3. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
    4. Krueger, Dirk & Ludwig, Alexander & Villalvazo, Sergio, 2021. "Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk," Journal of Public Economics, Elsevier, vol. 201(C).
    5. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-163, May.
    6. Jess Benhabib & Alberto Bisin, 2018. "Skewed Wealth Distributions: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1261-1291, December.
    7. Vasia Panousi & Catarina Reis, 2012. "Optimal capital taxation with idiosyncratic investment risk," Finance and Economics Discussion Series 2012-70, Board of Governors of the Federal Reserve System (U.S.).
    8. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
    9. Césaire Meh & Yaz Terajima, 2009. "Uninsurable investment risks and capital income taxation," Annals of Finance, Springer, vol. 5(3), pages 521-541, June.
    10. Mariacristina De Nardi, 2015. "Quantitative Models of Wealth Inequality: A Survey," NBER Working Papers 21106, National Bureau of Economic Research, Inc.
    11. Panousi, Vasia, 2009. "Financial Integration and Capital Accumulation," MPRA Paper 24238, University Library of Munich, Germany.
    12. Toda, Alexis Akira, 2014. "Incomplete market dynamics and cross-sectional distributions," Journal of Economic Theory, Elsevier, vol. 154(C), pages 310-348.
    13. Jason M. DeBacker & Bradley T. Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2012. "The properties of income risk in privately held businesses," Finance and Economics Discussion Series 2012-69, Board of Governors of the Federal Reserve System (U.S.).
    14. Jonathan Goldberg, 2014. "Idiosyncratic Investment Risk and Business Cycles," Finance and Economics Discussion Series 2014-05, Board of Governors of the Federal Reserve System (U.S.).
    15. Carlson Mark A & King Thomas & Lewis Kurt, 2011. "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, June.
    16. Jonathan Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-31, Board of Governors of the Federal Reserve System (U.S.).
    17. Anne Villamil & Zhigang Feng, 2017. "Regressive Subsidy to EHI and Entrepreneurial Talent Allocation," 2017 Meeting Papers 1059, Society for Economic Dynamics.
    18. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
    19. Shuhei Aoki & Makoto Nirei, 2016. "Pareto Distribution of Income in Neoclassical Growth Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 25-42, April.
    20. Jonathan Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-47, Board of Governors of the Federal Reserve System (U.S.).

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    Keywords

    Capital gains tax; Taxation;

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