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Entrepreneurial Taxation with Endogenous Entry

Florian Scheuer ()

American Economic Journal: Economic Policy, 2014, vol. 6, issue 2, 126-63

Abstract: I analyze the optimal taxation of profits and labor income under endogenous firm formation. Individuals differ in their skill and cost of setting up a firm, and can become workers or entrepreneurs. A tax system in which profits and labor income are subject to the same schedule uses general equilibrium effects through wages to indirectly redistribute across occupations. Optimal policies can involve low tax rates at the top and distortions of firms' input choices. However, these properties disappear under a differential treatment of profits and labor income. Then, redistribution is achieved directly through taxes and production efficiency is always optimal.

JEL-codes: H21 H24 H25 J24 L25 L26 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/pol.6.2.126
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Handle: RePEc:aea:aejpol:v:6:y:2014:i:2:p:126-63