Entrepreneurship, Frictions, and Top Marginal Tax Rates

Abstract

This paper studies the implications of entrepreneurship and financing frictions on top marginal income tax rates. When financing frictions are present, raising the top marginal tax rate has a negative effect on business income at the top through wealth distribution change in the long run. This paper argues that this negative long-term effect is potentially important in driving down the optimal top marginal tax rate. The baseline results suggest that the recent top marginal tax rates in the US are close to optimal for entrepreneurs.

Keywords: Entrepreneurship, Borrowing Constraints, Top Marginal Income Tax Rates

JEL Classification: E62, H21, H24