Optimal Taxation of Entrepreneurial Capital with Private Information

This article attempts to determine the best structure for the taxation of entrepreneurial capital and financial assets in economies, like that of the US, in which firms possess information not available to competitors or the public. Returns to entrepreneurial capital are risky and depend on entrepreneurs hidden effort. The authors find that entrepreneurial capital should be taxed at the firm level and again when it accrues to outside investors in the form of stock returns.