Entrepreneurship, taxation and capital investment

Sagiri Kitao

Research output: Contribution to journalArticle

28 Citations (Scopus)

Abstract

Augmenting a standard Bewley model with an entrepreneurial sector and occupational heterogeneity allows us to study important channels through which fiscal policies affect aggregate variables, factor prices, wealth distribution and welfare. To disentangle the forces involved, we consider flexible forms of taxation that distinguish between sources of income. Our quantitative analysis shows that reducing the tax burden on capital formation stimulates investment, but the effects vary depending on whether we target entrepreneurial capital or non-entrepreneurial capital. A low tax on capital income from savings increases the aggregate capital stock and production, but it also raises the opportunity cost of business investment. General equilibrium effects further discourage entrepreneurial investment due to a higher wage cost and a compensating tax increase on other sources of income. The reform is most effective when we reduce the tax on business income. A flat business tax of 10% will raise entrepreneurial investment by 20% in the long run. Workers also benefit as the wage increases by 5%. However, the adjustment costs associated with the transition make political support for such reforms difficult.

Original languageEnglish
Pages (from-to)44-69
Number of pages26
JournalReview of Economic Dynamics
Volume11
Issue number1
DOIs
Publication statusPublished - 2008 Jan
Externally publishedYes

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Income
Capital investment
Taxation
Entrepreneurship
Tax
Wages
Factor prices
Savings
Political support
Business taxes
General equilibrium
Business investment
Opportunity cost
Capital stock
Quantitative analysis
Capital formation
Tax burden
Costs
Wealth distribution
Fiscal policy

Keywords

  • Entrepreneurship
  • Heterogeneous agents
  • Income taxation

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Entrepreneurship, taxation and capital investment. / Kitao, Sagiri.

In: Review of Economic Dynamics, Vol. 11, No. 1, 01.2008, p. 44-69.

Research output: Contribution to journalArticle

Kitao, Sagiri. / Entrepreneurship, taxation and capital investment. In: Review of Economic Dynamics. 2008 ; Vol. 11, No. 1. pp. 44-69.
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