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American Economic Journal: Economic Policy: Vol. 6 No. 2 (May 2014)

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Entrepreneurial Taxation with Endogenous Entry

Article Citation

Scheuer, Florian. 2014. "Entrepreneurial Taxation with Endogenous Entry." American Economic Journal: Economic Policy, 6(2): 126-63.

DOI: 10.1257/pol.6.2.126

Abstract

I analyze the optimal taxation of profits and labor income under endogenous firm formation. Individuals differ in their skill and cost of setting up a firm, and can become workers or entrepreneurs. A tax system in which profits and labor income are subject to the same schedule uses general equilibrium effects through wages to indirectly redistribute across occupations. Optimal policies can involve low tax rates at the top and distortions of firms' input choices. However, these properties disappear under a differential treatment of profits and labor income. Then, redistribution is achieved directly through taxes and production efficiency is always optimal.

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Authors

Scheuer, Florian (Stanford U)

JEL Classifications

H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H25: Business Taxes and Subsidies including sales and value-added (VAT)
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
L25: Firm Performance: Size, Diversification, and Scope
L26: Entrepreneurship

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