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Taxation of top incomes and tax avoidance

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  • Di Nola, Alessandro
  • Kocharkov, Georgi
  • Scholl, Almuth
  • Tkhir, Anna-Mariia
  • Wang, Haomin

Abstract

This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance weakens the distortionary effects of higher income taxes at the top but makes them ineffective at lowering inequality. Eliminating tax avoidance by implementing an equal tax treatment of entrepreneurs across all legal forms of business organization substantially increases tax revenue, aggregate output, and welfare.

Suggested Citation

  • Di Nola, Alessandro & Kocharkov, Georgi & Scholl, Almuth & Tkhir, Anna-Mariia & Wang, Haomin, 2024. "Taxation of top incomes and tax avoidance," Discussion Papers 25/2024, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:300700
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    More about this item

    Keywords

    Tax Avoidance; Top Income Tax Rate; Occupational Choice; Legal Form of Organization; Wealth Inequality; Incomplete Markets; Heterogeneous Agents;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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