TY  - JOUR
AU  - Scheuer,Florian
TI  - Adverse Selection In Credit Markets and Regressive Profit Taxation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18406
PY  - 2012
Y2  - September 2012
UR  - http://www.nber.org/papers/w18406
L1  - http://www.nber.org/papers/w18406.pdf
N1  - Author contact info:
Florian Scheuer
Department of Economics
Stanford University
579 Serra Mall
Stanford, CA 94305
Tel: 650/725-3987
E-Mail: scheuer@stanford.edu
AB  - In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets.  Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.
ER  -