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, Entrepreneurship, and Estate Taxation
   Abstract

   In this paper, I investigate the efficiency and distributional implications of estate taxation in an OLG model that explicitly incorporates occupation choice between wage work and entrepreneur-ship, a non-homothetic bequest motive, and intergenerational transmission of ability. The model features two key components. First, the model incorporates a non-homothetic bequest function and the coexistence of parents and children. This modeling choice allows for a more nuanced perspective on the timing and incidence of inheritances. Children observe their parents’ state variables, allowing them to infer the size of the bequest they are likely to receive in the future. Consequently, inheritance influences children’s optimal decisions both directly, by altering their wealth holdings, and indirectly, through its anticipated effects. Second, by explicitly modeling entrepreneurship as a source of wealth concentration at the top, the framework provides a nuanced understanding of how inheritances and entrepreneurial returns jointly shape wealth inequality and broader economic outcomes. The key contribution of this paper is that the benchmark model is disciplined by novel empirical findings on the heterogeneity in the relative importance of inheritance, which I document from the data.

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.