Abstract
This paper studies the taxation of high-income entrepreneurs, with a focus on their income responses operating through wealth changes over time. I develop a tax formula that incorporates this mechanism and evaluate it within a quantitative model. The results show that income adjustments driven by wealth changes are crucial for generating a low optimal top marginal tax rate for entrepreneurs in the long run. However, when transitional dynamics that also include short-term considerations are taken into account, the optimal top marginal tax rates for entrepreneurs become as high as those suggested for workers.