Heterogeneous agents models with entrepreneurial choice have proven to be successful in explaining both the high saving rate of the rich and the high concentration of wealth found in modern economies. Explicitly considering entrepreneurship is therefore important to assess the aggregate and distributional effects of tax reforms. However, most studies analyzing tax reforms in this framework do not consider the empirical fi ndings showing that entrepreneurs tend to systematically evade more taxes than workers and that this behavior is quantitatively important. I augment a heterogeneous agent occupational choice model with a tax evasion decision to analyze the potential impact of this behavior in wealth inequality and tax reforms. I find that aggregate and distributional effects greatly differ when considering tax evasion.
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