Revisiting taxes on high incomes

Abstract

In this paper, we study income taxation in a model with entrepreneurial activity. We conduct two types of changes in tax policy: changing the overall progressivity of taxes versus changing the tax rate on the richest 1% of the population. Our results indicate that increasing the tax rate on the richest 1% of the population is more effective in raising revenues than increasing the overall progressivity of taxes as it leads to smaller declines in capital and output. We find that incorporating entrepreneurship in generating a reasonable wealth distribution leads to revenue-maximizing progressivity to be smaller than found previously.