Essays on Entrepreneurs and Taxation

Abstract

Apart from the introduction and conclusion, this thesis consists of three chapters focusing on taxation in the model with entrepreneurship. Using a simplified life-cycle structure, these three chapters aim to give policy implications regarding various kind of taxes in the U.S. economy. The focus is more involved with tax at the top wealth or income distribution, which necessitates the model capable of capturing the wealth distribution correctly. Including entrepreneurship in the model is one of the available approaches for replicating the U.S. wealth distribution. In chapter 2 (joint with Çagri Kumru) we study the interaction between estate taxation and annuity demand both analytically and quantitatively. Having entrepreneurs yields a novel finding for annuity demands of non-entrepreneurs (workers) and entrepreneurs. The simple analytical model shows that lower estate tax rates result in lower annuity demands. The quantitative model shows that annuity demand is indeed sensitive to the changes in the estate tax system. Removing the estate tax rate reduces the annuity demand substantially when the government’s budget is balanced with an increase in the proportional income tax rate. Removing the exemption level generates the most striking result that if all individuals face the estate tax, the annuity ownership rate increases dramatically. In chapter 3 (joint with Ayse Imrohoroglu and Çagri Kumru), we study optimal income taxation in a model with entrepreneurial activity. We conduct two types of changes in tax policy: changing the overall progressivity of taxes versus changing the tax rate of the richest one percent of the population. We study the implications of these tax policies on welfare, inequality, and government revenues. The results indicate that increasing the overall progressivity of taxes results in lower wealth inequality and higher welfare relative to increasing the tax rate on the richest one percent of the population. In chapter 4, I analyze the implications of the capital income tax, the wealth tax, and the estate tax on economic aggregates and welfare and search for the optimal wealth tax rate. When capital income tax is replaced by the wealth tax, there is a modest welfare gain. In contrast, replacing the current estate tax system with a wealth tax system leads to an overall welfare loss. The highest welfare gain is realized when the capital income tax is replaced by wealth tax at the top. Finally, the optimal wealth tax rate as 5.75 percent. Although the optimal wealth tax increases welfare substantially, it makes wealth inequality even worse. Show more