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Taxing Mobile and Overconfident Top Earners

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  • Andreas Haufler
  • Yukihiro Nishimura

Abstract

We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state and hence of receiving the bonus, whereas firms and governments are not. In this setting we show that overconfidence (i) unambiguously increases the bonus component in the managers’ compensation package and (ii) it reduces the bonus tax rate that governments set in the non-cooperative tax equilibrium. Hence overconfidence can contribute to explaining both the increasing role of bonus contracts and the fall in marginal tax rates for high-income earners.

Suggested Citation

  • Andreas Haufler & Yukihiro Nishimura, 2020. "Taxing Mobile and Overconfident Top Earners," CESifo Working Paper Series 8550, CESifo.
  • Handle: RePEc:ces:ceswps:_8550
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    References listed on IDEAS

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    More about this item

    Keywords

    overconfidence; bonus taxes; tax competition; migration;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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