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Taxation, entrepreneurship, and wealth

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  • Marco Cagetti
  • Mariacristina De Nardi

Abstract

Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealth concentration.

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  • Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship, and wealth," Staff Report 340, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:340
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    Cited by:

    1. Francisco Buera, 2009. "A dynamic model of entrepreneurship with borrowing constraints: theory and evidence," Annals of Finance, Springer, vol. 5(3), pages 443-464, June.
    2. Alexander Monge-Naranjo, 2009. "Entrepreneurship and firm heterogeneity with limited enforcement," Annals of Finance, Springer, vol. 5(3), pages 465-494, June.
    3. Erwan Quintin, 2008. "Contract enforcement and the size of the informal economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(3), pages 395-416, December.
    4. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
    5. Camilo Mondragón-Vélez & Ximena Peña, 2010. "Business Ownership and Self-Employment in Developing Economies: The Colombian Case," NBER Chapters,in: International Differences in Entrepreneurship, pages 89-127 National Bureau of Economic Research, Inc.
    6. Cagetti, Marco & De Nardi, Mariacristina, 2008. "Wealth Inequality: Data And Models," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 285-313, September.
    7. Grossmann, Volker & Strulik, Holger, 2010. "Should continued family firms face lower taxes than other estates?," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 87-101, February.
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    10. Tino Sanandaji & Peter T. Leeson, 2013. "Billionaires," Industrial and Corporate Change, Oxford University Press, vol. 22(1), pages 313-337, February.
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    12. He, Qichun, 2011. "The impact of the distribution of property rights on inventions on growth: a two-representative-agent model with asymmetric information," MPRA Paper 34450, University Library of Munich, Germany.
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    18. Katharine Anderson & Eric French & Tina Lam, 2004. "You can't take it with you: asset run-down at the end of the life cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 40-54.
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    21. Sagiri Kitao, 2008. "Entrepreneurship, taxation and capital investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 44-69, January.
    22. Facchini, Francois & Couvreur, Stéphane, 2015. "Inequality: The original economic sin of capitalism? An Evaluation of Thomas Piketty's "Capital in the twenty-first century"," European Journal of Political Economy, Elsevier, vol. 39(C), pages 281-287.
    23. 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.

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