Taxation of top incomes and tax avoidance

Author / Creator

Di Nola, Alessandro, author

Available as

Online

Summary

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 ...

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 lowers productive efficiency, generates sizable welfare losses, and reduces the effectiveness of the top marginal tax rate at lowering inequality. Tax avoidance reduces the optimal top marginal income tax rate from 47% to 43%.

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