Taxation, Entrepreneurship, and Wealth
Entrepreneurship is a key determinant of investment, saving, and
wealth inequality. We study the aggregate and distributional effects of
several tax reforms in a model that recognizes this key role and that
matches the large wealth inequality observed in the U.S. data. The aggregate
effects of tax reforms can be particularly large when they affect
small and medium-sized businesses, which face the most severe financial
constraints, rather than big businesses. The consequences of changes in
the estate tax depend heavily on the size of its exemption level. The
current effective estate tax system insulates smaller businesses from the
negative effects of estate taxation, minimizing the aggregate costs of redistribution.
Abolishing the current estate tax would generate a modest
increase in wealth inequality and slightly reduce aggregate output. Decreasing
the progressivity of the income tax generates large increases in
output, at the cost of large increases in wealth concentration.
