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 2025. Taxation of top incomes and tax avoidance. International Economic Review 66 (3) , pp. 983-1018. 10.1111/iere.12758

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Abstract

We examine the aggregate and distributional effects of raising the top marginal income tax rate in the presence of entrepreneurial tax avoidance. In a model with heterogeneous agents and occupational choice, entrepreneurs can avoid taxes by choosing the legal form of business organization and shifting income across tax bases. Applied to the U.S. 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 an equal tax treatment of entrepreneurs across all legal forms substantially increases tax revenue, aggregate output, and welfare.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Schools > Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HJ Public Finance
Publisher:	Wiley
ISSN:	0020-6598
Date of First Compliant Deposit:	6 January 2025
Date of Acceptance:	2 January 2025
Last Modified:	05 Nov 2025 15:53
URI:	https://orca.cardiff.ac.uk/id/eprint/175037

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