How to Tax Capitalists in the Twenty-First Century?
Abstract/Contents
- Abstract
- We study a design of the optimal tax system in an economy featuring active business owners running closely held, highly profitable businesses--a.k.a. capitalists in the twenty-first century. In line with the current U.S. law, they choose a legal form of firm's organization between a pass-through entity and a C corporation, which determines the way their business income is taxed. The model captures a key trade-off between these forms, C corporations face double taxation of profits but have easier access to external equity and can insure better against investment risk, relative to pass-through entities. Through endogenous selection, our model generates the predominant position of the pass-through business owners in line with the U.S. data. We compute the optimal fiscal policy under two revenue-neutral scenarios. Under the current U.S. legal restrictions, we find that the reform maximizing social welfare of the population cuts corporate income tax by half and decreases the progressivity of the tax code. This implies sizeable switch of economic activity towards C corporations, which improves allocation of capital in the economy but worsens the insurance provision and resource redistribution for workers. Under the uniform tax code for business income, we find that progressivity of the labor tax code should rise, and business income tax should be set to 36 percent. This optimal policy strictly dominates in terms of welfare the optimal policy computed under the current legal framework. Separation of labor income taxation from business income taxation enables the Ramsey planner to separate distortions of the labor supply margin from the distortions of the productive capital accumulation and the choice of the legal form of business organization margins.
Description
| Type of resource | text |
|---|---|
| Date created | August 16, 2021 |
Creators/Contributors
| Author | Dyrda, Sebastian |
|---|---|
| Author | Pugsley, Benjamin |
| Organizer of meeting | Auclert, Adrien |
| Organizer of meeting | Mitman, Kurt |
| Organizer of meeting | Tonetti, Christopher |
| Organizer of meeting | Wong, Arlene |
Subjects
| Subject | economics |
|---|---|
| Genre | Text |
| Genre | Working paper |
| Genre | Grey literature |
Bibliographic information
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- This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).
Preferred citation
- Preferred citation
- Dyrda, S. and Pugsley, B. (2022). How to Tax Capitalists in the Twenty-First Century?. Stanford Digital Repository. Available at https://purl.stanford.edu/ds835zx6563
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SITE Conference 2021
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