This paper studies the optimal top marginal income tax rate in a quantitative framework with entrepreneurial choice, financing constraints, and realistic earnings and wealth distributions. I find that the revenue-maximizing top tax rate is approximately 41 percent — close to the recent levels...

Models with entrepreneurship can reproduce high wealth concentration in the top. The key assumption is borrowing constraint, that is, households are unable to borrow enough assets to start a business or to invest to the optimal amount in the business. More recent evidence, however, shows that...