Taxing Entrepreneurs: Models and Reality
Professors Swoboda and Steiner have prepared a formidable paper for this conference, which carefully works through various aspects of the question: does progressivity of the income tax code affect optimal allocation of resources? In general, the answer is one familiar to those who have dwelled in financial economics: it depends upon the relevant utility function. This is wholly counter-intuitive to the general view of taxation, however. To most it appears instantly obvious that steeper tax scales limit risk-taking and, hence, lower productivity and welfare. The situation is a bit more complex than it appears; progressive tax rates can have relatively little consequence for the behavior of investors if, e.g., the utility function of the individual increases its level of risk aversion more quickly than the marginal tax rate rises. The contribution of their paper is to show and consider the consequence of the possible welfare effects of this sort of hedging via the tax code.
KeywordsRisk Aversion Welfare Effect Progressive Rate Progressive Taxation Lower Social Welfare
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