Taxation of top incomes and tax avoidance

Di Nola, Alessandro, Kocharkov, Georgi, Scholl, Almuth, Tkhir, Anna-Mariia and Wang, Haomin ORCID: https://orcid.org/0000-0001-5971-3206 2024. Taxation of top incomes and tax avoidance. [Online]. SSRN. Available at: http://dx.doi.org/10.2139/ssrn.4899090

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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 weakens the distortionary effects of higher income taxes at the top but makes them ineffective at lowering inequality. Eliminating tax avoidance by implementing an equal tax treatment of entrepreneurs across all legal forms of business organization substantially increases tax revenue, aggregate output, and welfare.

Item Type:	Website Content
Date Type:	Published Online
Status:	Submitted
Schools:	Business (Including Economics)
Publisher:	SSRN
Last Modified:	08 Oct 2024 10:58
URI:	https://orca.cardiff.ac.uk/id/eprint/171797

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