Wealth Taxation and Entrepreneurship
26 Pages Posted: 9 Nov 2012
Date Written: October 31, 2012
This paper studies wealth taxation in a heterogeneous agent economy with entrepreneurship. Entrepreneurs face borrowing constraints and stochastically receive the opportunity to sell their firm to outside investors. With the help of a novel panel dataset on household wealth, I show that this possibility for entrepreneurs to sell their firm is crucial to simultaneously account for both the stylized facts of the wealth distribution and year-to-year changes in wealth. In a subsequent policy experiment, I show that the effects of a wealth tax depend on how frequently entrepreneurs receive the opportunity to sell their firm. In an economy where this probability is low, taxing wealth reduces output by affecting the capacity of entrepreneurs to invest in their firm. In an economy where entrepreneurs can easily sell their firm, taxing their wealth has little aggregate effect. The policy implication is that improving financial markets reduces the output losses due to a wealth tax.
Keywords: Wealth distribution, heterogeneous agent model, entrepreneurship, capital taxation, IPO
JEL Classification: E21, L26
Suggested Citation: Suggested Citation