Marginal tax changes with risky investment

Patrick Macnamara, Myroslav Pidkuyko and Raffaele Rossi

No 2116, Working Papers from Banco de España

Abstract: Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.

Keywords: risky investment; elasticity of taxable income; life-cycle; entrepreneurs; structural estimation (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge, nep-ent, nep-mac, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2116

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