EconPapers    
Economics at your fingertips  
 

Entrepreneurship, Inequality, and Taxation

Cesaire Meh ()

Staff Working Papers from Bank of Canada

Keywords: Fiscal policy; Economic models (search for similar items in EconPapers)
JEL-codes: D31 E62 H20 H23 (search for similar items in EconPapers)
Pages: 56 pages Abstract: This paper confirms the conjecture that the evaluation of tax policy leads to very different conclusions once the role of entrepreneurs is considered. Contrary to previous literature, the author finds that switching from a progressive to a proportional income tax system has a negligible effect on wealth inequality in the United States. This surprising result arises because entrepreneurial activities moderate the effects of the policy change on the wealth distribution. The author shows that proportional income tax reform increases entrepreneurial investment and savings by reducing the marginal income tax rates paid by entrepreneurs. Within the model, an increase in business investment implies a higher demand for labour, which raises the wage rate of workers and drives down the average return to entrepreneurial activities. This general-equilibrium feedback narrows the income and savings gap between workers and entrepreneurs, and, in turn, leads to a reduction in income and wealth inequality. While the elimination of progressive income taxation increases entrepreneurial investments, it has almost no effect on the number of entrepreneurs, as the costs of entrepreneurial activities rise with increasing wages. The model is also able to account for the substantial share of income and wealth held by entrepreneurs, the high savings rate of entrepreneurs relative to workers, and the high concentration of wealth observed in the data.
Date: 2002
New Economics Papers: this item is included in nep-dge, nep-ent and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-14.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:02-14

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-01-25
Handle: RePEc:bca:bocawp:02-14