Research

Working Papers

1. Taxing Top Incomes in a World of Entrepreneurs
   Abstract

   This paper shows that high top marginal income tax rates generate large aggregate output and productivity losses. These losses arise because taxes distort decisions of entrepreneurs, who constitute a large share of high income earners. I identify two novel distortions. The first one is the "productivity investment effect". Top income tax rates distort the productivity accumulation decisions not only of entrepreneurs who are already in the top income bracket but also of those who will become top earners in the future by building up their firms. This is because households are forward looking. Anticipating that they will be subject to the high top income tax rate in the future, these middle-income entrepreneurs find it less optimal to accumulate productivity for their firms now. As a result, they slow down their productivity accumulation process. The second force is the "incorporation timing effect". Successful entrepreneurs grow their firms and then sell their businesses to the corporate sector through incorporation. High top tax rates push these entrepreneurs to sell before their firms reach their full productivity potential. This force is driven by a feature of the tax code: the sale of a firm is treated as capital gains, which are taxed at a lower rate than ordinary income. Therefore, when the top income tax rate gets higher, entrepreneurs tend to use incorporation as a tax shelter and incorporate their firms earlier. Early incorporation timing means entrepreneurs do not have enough time to grow their firms to their full productivity potential. These prematurely incorporated businesses lower productivity in the corporate sector. Both effects imply that even though it targets only a small fraction of households, increasing the top marginal income tax rate generates large output costs by decreasing productivity. Since lower productivity erodes the tax base, in a calibrated model, the revenue-maximizing top income tax rate is 45%.
2. Inheritance, Wealth Distribution, and Estate Taxation
   Abstract

   The estate tax has been considered by its supporters as a natural way to reduce wealth inequality because it targets the wealthy directly. However, this conclusion relies heavily on the underlying assumption that inheritance plays a crucial role in wealth accumulation for the rich. Using data from the Survey of Consumer Finances, this paper exhibits novel evidence about wealthy households and the inheritance they have received. Specifically: 1) less than 14% of the richest one percent's wealth is directly attributable to inheritances. 2) More than half of the top one percent by wealth do not receive any inheritances over their lifetime. Then, in a quantitative model that accounts for novel facts on inheritance received by the rich, this paper finds that even if the estate tax rate were raised to 100 percent, the top one percent wealth holding would drop by only 3.5 percentage points. Moreover, compared with taxing the incomes of the top one percent earners, taxing estates generates a large output loss for a given amount of wealth redistribution, suggesting that estate taxation may not be an effective tool for wealth redistribution.
3. Entrepreneurship and Inheritance

Work in Progress

1. What Should We Tax, Capital, Wealth, or Inheritance?
   Abstract

   In recent decades, wealth inequality has become an increasingly prominent issue in many developed countries. The United States, in particular, has seen significant increases in wealth gaps, sparking fierce debates over how best to address the issue. One of the most contentious proposals has been the idea of redistributive policies, including calls to tax capital income, wealth, and inheritance. In this paper, we examine the impacts of capital income, wealth, and estate taxation within a quantitative framework. In contrast to existing studies, we also investigate joint reforms, in which the government can simultaneously modify the schedules for all three taxes.
2. Entrepreneurship and Informality in Developing Countries (with Roberto Lagos Mondragon)
   Abstract

   The informal sector is a prominent feature of developing countries. These high informality levels have important consequences for development. Using the Brazilian National Household Sample Survey (PNAD) data, we present three main findings. First, surprisingly, over one-third of entrepreneurs in the top income decile of the entire Brazilian population operate businesses in the informal sector. Second, formal sector entrepreneurs are primarily concentrated in higher income groups, with 29.2% of them belonging to the top income decile and 61.5% to income deciles 8-10. Lastly, we observe that informal sector entrepreneurs in the top income group are more likely to switch to the formal sector, while formal sector entrepreneurs in the bottom income group are more likely to switch to the informal sector. We propose a general equilibrium, heterogeneous agent model with occupation choice and learning to reconcile these empirical observations. We then calibrate this model to match empirical moments. The calibrated model serves as a laboratory for conducting policy experiments.
3. Barriers to Credit Access for Black Entrepreneurship: A Self-fulfilling Perspective (with Xincheng Qiu)
   Abstract

   Black-owned businesses tend to operate with less finance and employ fewer workers than those owned by Whites. Using micro-data on Black- and White-owned startups, we observe a pronounced racial financing gap in the startup year. White entrepreneurs are more likely to secure bank loans, and, conditional on receiving a loan, they tend to receive higher amounts. However, this gap diminishes over time and disappears after seven years of operation. We propose a model rooted in the concept of self-fulfilling to account for this fact. When startups apply for a bank loan, they lack a production history. Consequently, banks rely on the overall performance of firms within racial groups to form their guess about the business quality for loan evaluations. As businesses establish a track record over time, they can leverage their own performance as a signal of quality. Consequently, banks increasingly base loan decisions on individual business performance rather than group averages. However, the initial lack of funding for many black-owned startups hampers their subsequent growth, reinforcing perceptions of lower quality among banks and perpetuating the cycle of limited credit access for black entrepreneurs.