This paper investigates the redistributive effects of taxation on occupa-
tional choice and growth. We discuss a two–sector economy in the spirit
of Romer (1990). Agents engage in one of two alternative occupations:
either self–employment in an intermediate goods sector characterized by
monopolistic competition, or employment as an ordinary worker in this
sector. Entrepreneurial profits are stochastic. The occupational choice un-
der risk endogenizes the number of firms in the intermediate goods indus-
try. While the presence of entrepreneurial risk results in a suboptimally
low number of firms and depresses growth, non–linear tax schemes are
partly capable of compensating the negative by effects by ex post provid-
ing a social insurance.