Taxation, entrepreneurship and wealth

Marco Cagetti and Mariacristina De Nardi
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Marco Cagetti: https://www.federalreserve.gov/econres/marco-cagetti.htm

No 632, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Entrepreneurship is a key determinant of investment, saving, wealth holdings, and wealth inequality. We study the aggregate and the distributional effects of several tax reforms in a model that recognizes the key role played by the entrepreneurs, and that matches very well the extreme degree of wealth inequality observed in the U.S. data. We find that the effects of tax reforms on output and capital formation can be particularly large when they affect the majority of small and medium-size businesses, which face the most severe financial constraints, rather than a small number of big businesses. We show that the consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system seems to insulate most of the businesses from the negative effects of estate taxation thus 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 progressivity of the income tax can generate large increases in output, as this stimulates entrepreneurial savings and capital formation, but at the cost of large increases in wealth concentration.

Keywords: Taxation (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-acc, nep-dge, nep-ent and nep-pbe
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Citations: View citations in EconPapers (1)

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Working Paper: Taxation, entrepreneurship, and wealth (2006)
Working Paper: Taxation, entrepreneurship, and wealth (2004)
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