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Entrepreneurship, Agency Frictions and Redistributive Capital Taxation


  • Corina Boar

    () (New York University)

  • Matthew Knowles

    () (University of St Andrews)


We study optimal capital taxation in a model with financial frictions, where the distribution of wealth across heterogeneous entrepreneurs affects how efficiently capital is used in the economy. The government sets linear taxes on wealth, consumption, capital and labor income to maximize the steady state welfare of workers, who own no wealth. In our setting, capital income taxes are particularly costly, because these taxes lead to a more inefficient allocation of capital and, ultimately, lower aggregate total factor productivity. We model financial frictions as arising endogenously as a result of an asymmetric information problem and find that the tightness of financial frictions is affected by tax rates. In our setting, optimal tax rates can be written as simple closed-form functions of pre-tax prices and parameters. We find that the optimal total tax burden on entrepreneurs should be zero, even though the government cares only about workers’ welfare.

Suggested Citation

  • Corina Boar & Matthew Knowles, 2020. "Entrepreneurship, Agency Frictions and Redistributive Capital Taxation," Discussion Paper Series, School of Economics and Finance 202004, School of Economics and Finance, University of St Andrews.
  • Handle: RePEc:san:wpecon:2004

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    References listed on IDEAS

    1. Neil Mehrotra & Nicolas Crouzet, 2017. "Small and Large Firms over the Business Cycle," 2017 Meeting Papers 600, Society for Economic Dynamics.
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    5. Jess Benhabib & Bálint Szőke, 2021. "Optimal Positive Capital Taxes at Interior Steady States," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 114-150, January.
    6. Catarina Reis & Vasia Panousi, 2012. "Optimal Capital Taxation with Idiosyncratic Investment Risk," 2012 Meeting Papers 732, Society for Economic Dynamics.
    7. Devereux, Michael P., 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.
    8. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
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    10. Abo-Zaid Salem, 2014. "Optimal capital-income taxation in a model with credit frictions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-26, January.
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    Cited by:

    1. Corina Boar & Virgiliu Midrigan, 2020. "Efficient Redistribution," NBER Working Papers 27622, National Bureau of Economic Research, Inc.

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    More about this item


    Optimal Taxation; Capital Taxation; Entrepreneurship; Financial Frictions;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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