Entrepreneurship, Wealth Inequality, and Taxation

Cesaire Meh

Review of Economic Dynamics, 2005, vol. 8, issue 3, 688-719

Abstract: This paper investigates the importance of entrepreneurship when quantifying the aggregate and distributional effects of switching from a progressive to a proportional income tax system. I find that the distributional consequences of the tax reform in a model economy with entrepreneurs contrast markedly from those in a model economy with no entrepreneurs. The elimination of progressive taxation has a negligible effect on wealth inequality when entrepreneurship is considered but has a large effect when entrepreneurship is omitted. The framework used is an occupational choice model, in which the decision to become an entrepreneur is determined by the ability to manage a firm and by asset holdings. The calibrated economy can account for the high savings rate of entrepreneurs relative to non-entrepreneurs, and the high concentration of wealth observed in the data. (Copyright: Elsevier)

Keywords: Entrepreneurship; Distribution of wealth; Progressive taxation; Proportional taxation; Financial constraints. (search for similar items in EconPapers)
JEL-codes: D31 E62 H20 H23 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (74)

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DOI: 10.1016/j.red.2005.03.001

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