TY  - JOUR
AU  - Albanesi, Stefania
TI  - Optimal Taxation of Entrepreneurial Capital with Private Information
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12419
PY  - 2006
Y2  - August 2006
DO  - 10.3386/w12419
UR  - http://www.nber.org/papers/w12419
L1  - http://www.nber.org/papers/w12419.pdf
N1  - Author contact info:
Stefania Albanesi
Department of Economics
University of Pittsburgh
4901 Wesley W. Posvar Hall
Pittsburgh, PA 15260
E-Mail: stefania.albanesi@gmail.com
M1  - published as Stefania Albanesi. "Optimal Taxation of Entrepreneurial Capital with Private Information," in Michael Devereux and Roger Gordon, organizers, "Business Taxation (Trans-Atlantic Public Economics Seminar)" American Economic Journal: Economic Policy, Volume 6, no. 2 (2014)

M3  - presented at "SI 2005 EFG Working Group (EFCE)", July 18-22, 2005
AB  - This paper studies optimal taxation of entrepreneurial capital with private information and multiple assets.  Entrepreneurial activity is subject to a dynamic moral hazard problem and entrepreneurs face idiosyncratic capital risk.  We first characterize the optimal allocation subject to the incentive compatibility constraints resulting from the private information.  The optimal tax system implements such an allocation as a competitive equilibrium for a given market structure.  We consider several market structures that differ in the assets or contracts traded and obtain three novel results.  First, differential asset taxation is optimal. Marginal taxes on bonds depend on the correlation of their returns with idiosyncratic capital risk, which determines their hedging value.  Entrepreneurial capital always receives a subsidy relative to other assets in the bad states.  Second, if entrepreneurs are allowed to sell equity, the optimal tax system embeds a prescription for double taxation of capital income â€" at the firm level and at the investor level.  Finally, we show that taxation of assets is essential even with competitive insurance contracts, when entrepreneurial portfolios are also unobserved.
ER  -