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on Public Finance |
| By: | Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia; Wang, Haomin |
| 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. |
| Keywords: | Tax Avoidance, Top Income Tax Rate, Occupational Choice, Legal Form of Organization, Wealth Inequality, Incomplete Markets, Heterogeneous Agents |
| JEL: | E21 E62 H25 H26 H32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:300700 |
| By: | Klejdysz, Justyna (LMU Munich and ifo Institute); Zawisza, Tom (OECD and Institute for Fiscal Studies) |
| Abstract: | How does the differential tax treatment of employees versus self-employed affect the decision to switch to self-employment? Using administrative data on the universe of taxpayers, we study the impact of a large tax cut for business owners in Poland on high-income individuals’ decisions to transition from employment to self-employment. In 2004, the marginal tax rate for business owners in the top income bracket decreased from 40% to a flat rate of 19%, while employees remained subject to a progressive tax schedule with a top rate of 40%. We find a 17% increase in the probability of high-income employees switching to self-employment five years after the reform. The increase in entries to self-employment was driven by increased transitions to long-term solo self-employment (self-employment without dependent workers), especially in high-skilled service industries. In 2009, another reform reduced the tax differential. The entries from employment to self-employment temporarily decreased, but those who had previously switched to self-employment did not return to employment. These findings suggest that large tax differentials increased the attractiveness of self-employment as an alternative to employment but also increased the share of entrants to self-employment who do not hire workers. |
| Keywords: | employment; self-employment; optimal taxation; income tax; highincome earners |
| JEL: | D31 H20 J62 L26 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:ris:mfplwp:0043 |