Taxation of top incomes and tax avoidance

Alessandro Di Nola, Georgi Kocharkov, Almuth Scholl, Anna-Mariia Tkhir and Haomin Wang

No 25/2024, Discussion Papers from Deutsche Bundesbank

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 (search for similar items in EconPapers)
JEL-codes: E21 E62 H25 H26 H32 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-acc, nep-dge, nep-ent, nep-pbe and nep-pub
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https://www.econstor.eu/bitstream/10419/300700/1/1897500459.pdf (application/pdf)

Related works:
Working Paper: Taxation of Top Incomes and Tax Avoidance (2023)
Working Paper: Taxation of Top Incomes and Tax Avoidance (2023)
Working Paper: Taxation of Top Incomes and Tax Avoidance (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:300700

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