Optimal Taxation of Risky Entrepreneurial Capital

Corina Boar and Matthew Knowles
Additional contact information
Corina Boar: New York University

No 166, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.

Keywords: Entrepreneurship; Financial Frictions; Taxation (search for similar items in EconPapers)
JEL-codes: E2 E6 H2 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2022-05
New Economics Papers: this item is included in nep-dge, nep-ent, nep-mac, nep-pbe, nep-pub and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_166_2022.pdf First version, 2022 (application/pdf)

Related works:
Journal Article: Optimal taxation of risky entrepreneurial capital (2024)
Working Paper: Optimal Taxation of Risky Entrepreneurial Capital (2022)
Working Paper: Optimal Taxation of Risky Entrepreneurial Capital (2022)
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:ajk:ajkdps:166

Access Statistics for this paper

More papers in ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany Niebuhrstrasse 5, 53113 Bonn, Germany.
Bibliographic data for series maintained by ECONtribute Office ().