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

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  • Thomas Piketty
  • Emmanuel Saez
  • Stefanie Stantcheva

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 6 (2014)
Issue (Month): 1 (February)
Pages: 230-71

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Handle: RePEc:aea:aejpol:v:6:y:2014:i:1:p:230-71

Note: DOI: 10.1257/pol.6.1.230
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  1. Kleven, Henrik & Landais, Camille & Saez, Emmanuel, 2010. "Taxation and International Migration of Superstars: Evidence from the European Football Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8134, C.E.P.R. Discussion Papers.
  2. A B Atkinson & Andrew Leigh, 2010. "The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Twentieth Century," CEPR Discussion Papers 640, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  3. Emmanuel Saez, 2002. "Direct or Indirect Tax Instruments for Redistribution: Short-run versus Long-run," NBER Working Papers 8833, National Bureau of Economic Research, Inc.
  4. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  5. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  6. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
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  1. Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing
    by Blog Admin in British Politics and Policy at LSE on 2012-10-25 13:00:36
  2. Taxes & growth
    by chris dillow in Stumbling and Mumbling on 2014-01-27 14:49:16
  3. Inequality: a missing perspective
    by chris dillow in Stumbling and Mumbling on 2014-04-24 13:28:09
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