Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship

Vesa Kanniainen and Paolo Panteghini

Working Papers from University of Brescia, Department of Economics

Abstract: This paper shows that taxes which are understood to be neutral with respect to the marginal investment decisions may be distortionary with respect to entrepreneurial decisions. In particular, we apply an intertemporal model to show that a comprehensive income tax is distortionary unless all kinds of income are sublect to the same tax rate and worker's option to become an entrepreneur is accounted for. Similarly, the harsh condition of a uniform tax rate is necessary but not sufficient under "new view" dividend tax, cash flow tax, and ACE tax, so that the occupational choice is not distorted. In any case, informational problems may arise and lead to distortive effects.

Date: 2008
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Journal Article: Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship (2013)
Working Paper: Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship (2008)
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