Taxation of Top Incomes and Tax Avoidance

Alessandro Di Nola, Georgi Kocharkov, Almuth Scholl, Anna-Mariia Tkhir and Haomin Wang

No 17970, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance lowers productive efficiency, generates sizable welfare losses, and reduces the effectiveness of the top marginal tax rate at lowering inequality. Tax avoidance reduces the optimal top marginal income tax rate from 47 % to 43 %.

Keywords: Tax; avoidance (search for similar items in EconPapers)
JEL-codes: E21 E62 H25 H26 H32 (search for similar items in EconPapers)
Date: 2023-03
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Related works:
Working Paper: Taxation of top incomes and tax avoidance (2024)
Working Paper: Taxation of Top Incomes and Tax Avoidance (2023)
Working Paper: Taxation of Top Incomes and Tax Avoidance (2022)
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