Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 994: Entrepreneurial Taxation with Endogenous Firm Entry and Unemployment

Johan Holmberg ()
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Johan Holmberg: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper deals with optimal nonlinear taxation of labor and entrepreneurial income and extends the recent study of Scheuer (2014) to accommodate equilib- rium unemployment. We find that even if employment is endogenous, the govern- ment can achieve redistribution of income through taxation without distorting production efficiency. This is possible if the government taxes entrepreneurial and labor income separately. The results also show that including involuntary unem- ployment creates an incentive to tax entrepreneurial income at lower marginal rates and labor income at higher marginal rates than otherwise.

Keywords: Optimal Taxation; Entrepreneurship; Occupational choice; Unemployment

JEL-codes: H21; H25; J24; J65; L26

34 pages, June 30, 2021

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