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The Effects of a Bonus Tax on Manager Compensation and Welfare

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  • Doina Radulescu

Abstract

This paper analyses the implications of a bonus tax for compensation components and firm profits, and studies its incidence as well as welfare implications. Using a principal-agent model with endogenous or exogenous reservation wages, we show how the effort-based compensation component changes in the country introducing the tax. Moreover, with exogenous reservation wages, the bonus tax negatively affects profits and dividends such that the incidence falls on the firm's shareholders. With endogenous reservation wages, the results are largely similar.

Suggested Citation

  • Doina Radulescu, 2012. "The Effects of a Bonus Tax on Manager Compensation and Welfare," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 1-16, March.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201203)68:1_1:teoabt_2.0.tx_2-z
    DOI: 10.1628/001522108X631998
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    References listed on IDEAS

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    1. Thomas Philippon & Ariell Reshef, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," NBER Working Papers 14644, National Bureau of Economic Research, Inc.
    2. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    3. Christelle Viauroux & Barnali Gupta, 2009. "Is Tax sharing Optimal? An Analysis in a Principal-Agent Framework," UMBC Economics Department Working Papers 09-105, UMBC Department of Economics.
    4. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    5. Brian J. Hall & Jeffrey B. Liebman, 2000. "The Taxation of Executive Compensation," NBER Chapters,in: Tax Policy and the Economy, Volume 14, pages 1-44 National Bureau of Economic Research, Inc.
    6. Peter Katuscák, 2009. "Taxes and Executive Compensation: Evidence from the 1990s," CESifo Economic Studies, CESifo, vol. 55(3-4), pages 542-568.
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    Citations

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    Cited by:

    1. Diego d'Andria & Ivan Savin, 2015. "Motivating innovation in a knowledge economy with tax incentives," Jena Economic Research Papers 2015-004, Friedrich-Schiller-University Jena.
    2. Hilmer, Michael, 2014. "Too many to fail - How bonus taxation prevents gambling for bailouts," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100552, Verein für Socialpolitik / German Economic Association.
    3. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.
    4. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS
    5. Dietl, Helmut M. & Grossmann, Martin & Lang, Markus & Wey, Simon, 2013. "Incentive effects of bonus taxes in a principal-agent model," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 93-104.
    6. Voßmerbäumer, Jan, 2012. "Effizienzwirkungen einer Regulierung von Managergehältern durch das Steuerrecht," arqus Discussion Papers in Quantitative Tax Research 125, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Michael Hilmer, 2014. "Bailouts, Bonuses and Bankers' Short-Termism," Working Papers tax-mpg-rps-2014-17, Max Planck Institute for Tax Law and Public Finance.
    8. Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
    9. Besley, Timothy & Ghatak, Maitreesh, 2011. "Taxation and regulation of bonus pay," LSE Research Online Documents on Economics 58192, London School of Economics and Political Science, LSE Library.
    10. Gietl, Daniel & Haufler, Andreas, 2016. "Bonus Taxes and International Competition for Bank Managers," Annual Conference 2016 (Augsburg): Demographic Change 145615, Verein für Socialpolitik / German Economic Association.
    11. Diego d'Andria, 2016. "Taxation and Incentives to Innovate: A Principal-Agent Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(1), pages 96-123, March.
    12. repec:eee:tefoso:v:127:y:2018:i:c:p:38-56 is not listed on IDEAS
    13. Voßmerbäumer, Jan & Wagner, Franz W., 2013. "Steuerwirkungen betrieblicher Entgeltpolitik," arqus Discussion Papers in Quantitative Tax Research 144, arqus - Arbeitskreis Quantitative Steuerlehre.
    14. Michael Hilmer, 2014. "Too Many to Fail - How Bonus Taxation Prevents Gambling for Bailouts," Working Papers tax-mpg-rps-2014-18, Max Planck Institute for Tax Law and Public Finance.

    More about this item

    Keywords

    bonus tax; labor taxation; effort; manager compensation; welfare;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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