Higher Taxes at the Top: The Role of Entrepreneurs

Brüggemann, Bettina

doi:10.2139/ssrn.3084737

Cited by 14 publications

(12 citation statements)

References 28 publications

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“…1 For the top 1 percent, the ETI is more than doubled (i.e., from 0.37 to 0.77), while for the bottom 90 percent, the ETI increases by 19 percent (i.e., from 0.59 to 0.70). In contrast, in standard models without return heterogeneity, or in models which match the fat tail of the wealth distribution through a superstar earnings state (e.g., Kindermann and Krueger, 2020;Brüggemann, 2020), incomes at the top are less elastic to marginal tax changes. Furthermore, our results for the long-run are similar to the short-run results presented in Mertens and Montiel Olea (2018).…”

Section: Introductionmentioning

confidence: 95%

“…Our focus, however, is on the importance of return heterogeneity for the long-run consequences of marginal tax changes. Moreover, several recent papers focus on the optimal tax rate for the top 1 percent (e.g., Badel et al, 2020;Kindermann and Krueger, 2020;Brüggemann, 2020). Since tax reforms frequently affect most (if not all) taxpayers rather than just the top 1 percent, we instead focus on tax changes which affect marginal tax rates along the whole distribution of income.…”

Section: Introductionmentioning

confidence: 99%

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Marginal Tax Changes with Risky Investment

2021

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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.

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Section: Introductionmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Marginal Tax Changes with Risky Investment

2021

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“…11 The environment in this paper is static. For dynamic models that consider the modeling and taxation of entrepreneurial wealth, refer to Quadrini (2000), Cagetti and Nardi (2006), Albanesi (2011), Shourideh (2012, Brüggemann (2016). incentive constraints.…”

Section: R E L a T E D L I T E R A T U R Ementioning

confidence: 99%

Taxing Atlas: Executive compensation, firm size, and their impact on optimal top income tax rates

Ales

Bellofatto

Wang

2017

Review of Economic Dynamics

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We study the optimal taxation of top labor incomes. Top income earners are modeled as managers who operate a span of control technology as in Rosen (1982). Managers are heterogeneous across talent, which is both effort-augmenting and total-factor-productivity improving. The latter gives rise to a positive scale-of-operations effect. A tax formula for optimal taxes is derived linking optimal marginal tax rates to preferences and technology parameters. We show how to quantify the model using readily available firm-level data. Our benchmark calibration focuses on the US. Our results suggest that optimal top taxes are roughly in line with the current statutory rates and, thus, are significantly lower than what previous optimal taxation studies that ignore the scale-of-operations effect have shown.Similar quantitative findings hold when we extend the analysis to a panel of developed countries. (JEL D31, H21, H24, M12, M52) * We thank Jeremy Bertomeu and Adriano Rampini for valuable discussions. We also thank Hank Bessembinder, Emilio Bisetti, Chris Edmond, Miguel Ferreira, Brent Glover, Burton Hollifield, Roozbeh Hosseini, Greg Kaplan, Finn Kydland, Christos Makridis, Pricila Maziero, Tomasz Piskorski, B. Ravikumar, Peter Rupert, Florian Scheuer, Ali Shourideh, Chris Sleet, Stephen Spear, Chris Telmer, Gustavo Ventura, Sunil Wahal, Randy Wright, Sevin Yeltekin, Ariel Zetlin-Jones and Marianne Holohan for editorial assistance. We also thank conference and seminar participants at Carnegie Mellon Ph.D. Macro-Finance lunch, Econometric Society summer meetings in Minneapolis, Society for Economic Dynamics annual meeting in Toronto, 5 th Tepper-LAEF conference in Pittsburgh, the University of Melbourne, 2015 WAMS/LAEF conference in Sydney, Arizona State University, University of Arizona, 2016 UNC Tax Symposium, and UNSW for feedback. E-mail: ales@cmu.edu (Ales); a.bellofatto@uq.edu.au (Bellofatto); Jessie.Jiaxu.Wang@asu.edu (Wang). I N T R O D U C T I O NHeightened concerns over recent trends in income inequality necessarily bring the taxation of high earners to the forefront of the policy agenda. 1 However, the vast literature in public finance is far from reaching consensus on what the top income tax rate should be: While the dominant view sets the optimal top tax rate above 70 percent, others have challenged the validity of such elevated taxes on various grounds. 2 This paper introduces a novel approach to modeling and quantifying the behavior of highly talented individuals in the economy, thus contributing to the aforementioned debate. Within top income earners, we focus on managers and show how to exploit well-established facts on firm size and managerial compensation to pin down the key forces shaping optimal income taxes. We find that top income taxes at the optimum are actually aligned with the current statutory rates in the US, unlike prevailing recommendations in the literature.Our approach is to take the standard optimal taxation environment and augment it with a role for managers via a span of control...

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“…Therefore, they lose more if taxes are perfectly enforced. Workers and selfemployed in the top decile of wealth encounter welfare gains from the elimination of tax 18 Our approach to calculating heterogeneous welfare eects in the presence of occupational choice resembles the welfare analysis of tax policies in Brüggemann (2017). Further details are described in Appendix B.5.…”

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confidence: 99%

The aggregate consequences of tax evasion

Nola

Kocharkov

Scholl

et al. 2021

Review of Economic Dynamics

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There is a sizable overall tax gap in the U.S., albeit tax non-compliance diers sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, selfemployment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare eects because it acts as a subsidy for the self-employed. Workers, however, suer from substantial welfare losses.

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Higher Taxes at the Top: The Role of Entrepreneurs

Cited by 14 publications

References 28 publications

Marginal Tax Changes with Risky Investment

Marginal Tax Changes with Risky Investment

Taxing Atlas: Executive compensation, firm size, and their impact on optimal top income tax rates

The aggregate consequences of tax evasion

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