The Effects of a Bonus Tax on Manager Compensation and Welfare
This paper analyses the implications of a currently publicly debated issue, namely the introduction of a bonus tax. We shed light on the effects of the bonus tax on compensation components and study its incidence. We use the Principal Agent model within a two-country framework and consider two main scenarios. In the first scenario the firm cannot relocate managers between countries whereas in the second scenario relocation possibilities exist. Our findings show that the effort based compensation component always rises in the country introducing the tax such that the optimal contracts are tilted towards more effort based pay. Moreover, the bonus tax negatively affects profits and dividends and thus the incidence falls on the firm’s shareholders. With no relocation possibilities, the country that does not introduce such a tax will be worse off in terms of welfare, as the dividend income accruing to its residents declines. Accordingly, the bonus tax can be interpreted as a transfer from the worldwide shareholders to the government levying the tax. However, the welfare results may be reversed when manager relocation is an alternative. In this case, welfare in the country introducing the tax is lower than in the no relocation scenario, while the country that does not levy a bonus tax might even gain in welfare terms.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brian J. Hall & Jeffrey B. Liebman, 2000.
"The Taxation of Executive Compensation,"
in: Tax Policy and the Economy, Volume 14, pages 1-44
National Bureau of Economic Research, Inc.
- 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.
- 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.
- Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
- 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.
- Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
- Peter Katuscák, 2009. "Taxes and Executive Compensation: Evidence from the 1990s," CESifo Economic Studies, CESifo, vol. 55(3-4), pages 542-568.
- Philippon, Thomas & Reshef, Ariell, 2009.
"Wages and Human Capital in the U.S. Financial Industry: 1909-2006,"
CEPR Discussion Papers
7282, C.E.P.R. Discussion Papers.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3030. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.