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Flat-Tax Reform with Occupational Choice

Author

Listed:
  • Radim Bohacek

    (Economics CERGE-EI)

  • Jozef Zubricky

Abstract

This paper studies the effects of a flat-tax reform in a dynamic, general equilibrium model with heterogeneous agents and occupational choice. Each agent has a choice to be a worker or to establish a firm and become an entrepreneur with a limited ability to borrow in financial markets. Because of limited commitment, whether an agent becomes an entrepreneur depends on his entrepreneurial skill and accumulated assets needed to finance a business project with uncertain returns. Occupational choice allows us to study the intensive margin of production, that is the number and size of firms, as well as the extensive margin, the entry and exit of firms. We also analyze the effect of the progressive tax schedule and the flat-tax reform on efficiency, welfare, inequality, and the political support for the reform. The simulated economy replicates U.S. data on the distribution of wealth and income, and the shares of wealth and income for each occupation. The flat-tax reform has sizeable effects on entrepreneurial activity on both margins

Suggested Citation

  • Radim Bohacek & Jozef Zubricky, 2006. "Flat-Tax Reform with Occupational Choice," 2006 Meeting Papers 323, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:323
    as

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    More about this item

    Keywords

    Taxation; Occupational choice; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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