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Taxation of Top Incomes and Tax Avoidance

Author

Listed:
  • 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 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 %.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Di Nola, Alessandro & Kocharkov, Georgi & Scholl, Almuth & Tkhir, Anna-Mariia & Wang, Haomin, 2022. "Taxation of Top Incomes and Tax Avoidance," VfS Annual Conference 2022 (Basel): Big Data in Economics 264016, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc22:264016
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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