Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300700 
Year of Publication: 
2024
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 25/2024
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance weakens the distortionary effects of higher income taxes at the top but makes them ineffective at lowering inequality. Eliminating tax avoidance by implementing an equal tax treatment of entrepreneurs across all legal forms of business organization substantially increases tax revenue, aggregate output, and welfare.
Subjects: 
Tax Avoidance
Top Income Tax Rate
Occupational Choice
Legal Form of Organization
Wealth Inequality
Incomplete Markets
Heterogeneous Agents
JEL: 
E21
E62
H25
H26
H32
ISBN: 
978-3-98848-000-2
Document Type: 
Working Paper

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