Is Tax sharing Optimal? An Analysis in a Principal-Agent Framework
AbstractWe study the effects of a statutory wage tax sharing rule in a principal - agent framework with moral hazard (à la Holmstrom, 1979) using the approach of Bose, Pal, Sappington (2007) to model the stochastic relationship between the agent's unobserved effort and his observed performance. The analysis indicates that tax sharing with positive legislated contributions from both the employer and employee does not maximize any of the outcomes -- employee effort, wages, profits or welfare. Moreover, a rule which specifies a corner solution, with 100% of the tax statutorily levied on the employer will maximize effort, expected profit and expected welfare while 100% of the tax statutorily levied on the employee will maximize expected wages.
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Bibliographic InfoPaper provided by UMBC Department of Economics in its series UMBC Economics Department Working Papers with number 09-105.
Length: 5 pages
Date of creation: 05 Oct 2011
Date of revision:
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Postal: UMBC Department of Economics 1000 Hilltop Circle Baltimore MD 21250, USA
Web page: http://www.umbc.edu/economics
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Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-10 (All new papers)
- NEP-CTA-2009-10-10 (Contract Theory & Applications)
- NEP-LAB-2009-10-10 (Labour Economics)
- NEP-PBE-2009-10-10 (Public Economics)
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