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Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities †

Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities † Abstract This paper derives optimal top tax rate formulas in a model where top earners respond to taxes through three channels: labor supply, tax avoidance, and compensation bargaining. The optimal top tax rate increases when there are zero-sum compensation-bargaining effects. We present empirical evidence consistent with bargaining effects. Top tax rate cuts are associated with top one percent pretax income shares increases but not higher economic growth. US CEO “pay for luck” is quantitatively more prevalent when top tax rates are low. International CEO pay levels are negatively correlated with top tax rates, even controlling for firms' characteristics and performance. (JEL D31, H21, H24, H26, M12 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Economic Policy American Economic Association

Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities †

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Publisher
American Economic Association
Copyright
Copyright © 2014 by the American Economic Association
Subject
Articles
ISSN
1945-7731
eISSN
1945-774x
DOI
10.1257/pol.6.1.230
Publisher site
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Abstract

Abstract This paper derives optimal top tax rate formulas in a model where top earners respond to taxes through three channels: labor supply, tax avoidance, and compensation bargaining. The optimal top tax rate increases when there are zero-sum compensation-bargaining effects. We present empirical evidence consistent with bargaining effects. Top tax rate cuts are associated with top one percent pretax income shares increases but not higher economic growth. US CEO “pay for luck” is quantitatively more prevalent when top tax rates are low. International CEO pay levels are negatively correlated with top tax rates, even controlling for firms' characteristics and performance. (JEL D31, H21, H24, H26, M12 )

Journal

American Economic Journal: Economic Policy – American Economic Association

Published: Feb 1, 2014

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