Higher Taxes at the Top: The Role of Entrepreneurs

Abstract

This paper computes optimal top marginal tax rates in Bewley-Aiyagari type economies that include entrepreneurs. Consistent with the data, entrepreneurs are over-represented at the top of the income distribution and are thus disproportionately affected by an increase in the top marginal income tax rate. The statutory top marginal tax rate that maximizes welfare is 75 percent and revenue is maximized at 85 percent. While average welfare gains are positive, they are larger for entrepreneurs than for workers and the occupational gap in welfare gains widens with increasing income.