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Optimal Taxation with Rent-Seeking

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  • Casey Rothschild
  • Florian Scheuer

Abstract

Recent policy proposals have suggested taxing top incomes at very high rates on the grounds that some or all of the highest wage earners are engaged in socially unproductive or counterproductive activities, such as externality imposing speculation in the financial sector. To address this, we provide a model in which agents can choose between working in a traditional sector, where private and social products coincide, and a crowdable rent-seeking sector, where some or all of earned income reflects the capture of pre-existing output rather than increased production. We characterize Pareto optimal linear and non-linear income tax systems under the assumption that the social planner cannot or does not observe whether any given individual is a traditional worker or a rent-seeker. We find that optimal marginal taxes on the highest wage earners can remain remarkably modest even if all high earners are socially unproductive rent-seekers and the government has a strong intrinsic desire for progressive redistribution. Intuitively, taxing their effort at a lower rate stimulates their rent-seeking efforts, thereby keeping private returns for other potential rent-seekers low and discouraging further entry.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17035.

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Date of creation: May 2011
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Handle: RePEc:nbr:nberwo:17035

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Cited by:
  1. Vitor F. Luz & Carlos E. da Costa, 2011. "Separability and Memory: Micro Causes, Macro Consequences," 2011 Meeting Papers 916, Society for Economic Dynamics.
  2. Kahana, Nava & Klunover, Doron, 2014. "Rent Seeking and the Excess Burden of Taxation," IZA Discussion Papers 8160, Institute for the Study of Labor (IZA).
  3. Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
  4. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 6(2), pages 126-63, May.
  5. Eric Weyl & Charles Nathanson & Ben Lockwood, 2013. "Taxation and the Allocation of Talent," 2013 Meeting Papers, Society for Economic Dynamics 56, Society for Economic Dynamics.
  6. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," STICERD - Public Economics Programme Discussion Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 19, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  7. Timothy Besley & Maitreesh Ghatak, 2013. "Bailouts and the Optimal Taxation of Bonus Pay," American Economic Review, American Economic Association, American Economic Association, vol. 103(3), pages 163-67, May.
  8. Hoffmann, Florian & Inderst, Roman & Moslener, Ulf, 2013. "Taxing Externalities under Financing Constraints," MPRA Paper 53855, University Library of Munich, Germany.
  9. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
  10. Vitor F. Luz & Carlos E. da Costa, 2010. "The Private Memory of Aggregate Shocks," 2010 Meeting Papers, Society for Economic Dynamics 368, Society for Economic Dynamics.
  11. Costa, Carlos Eugênio da & Luz, Vitor F., 2010. "The Private Memory of Aggregate Shocks," Economics Working Papers (Ensaios Economicos da EPGE) 706, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  12. Casey Rothschild, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 623-668.
  13. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
  14. Alexander M. Gelber & Matthew C. Weinzierl, 2012. "Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," NBER Working Papers 18332, National Bureau of Economic Research, Inc.
  15. Alexander Gelber & Matthew Weinzierl, 2012. "Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," Harvard Business School Working Papers, Harvard Business School 13-014, Harvard Business School, revised Mar 2014.
  16. Florian Scheuer & Casey Rothschild, 2012. "Redistributive Taxation in a Roy Model," 2012 Meeting Papers, Society for Economic Dynamics 395, Society for Economic Dynamics.
  17. Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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