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Incentives, Globalization, and Redistribution

Author

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  • Haufler, Andreas

    (University of Munich and CESifo)

  • Perroni, Carlo

    (University of Warwick and CESifo)

Abstract

We offer a new explanation for why taxes have become less progressive in many countries in parallel with an increase in income inequality. When performancebased compensation differentials are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted. Taxation reduces after-tax income inequality but undermines incentive contracts, lowering effort and raising pre-tax income differentials. Market integration can widen the spread of project returns and make contract choices more responsive to changes in the level of taxation, resulting in a lower optimum income tax rate even when individuals are not inter-jurisdictionally mobile.

Suggested Citation

  • Haufler, Andreas & Perroni, Carlo, 2020. "Incentives, Globalization, and Redistribution," CAGE Online Working Paper Series 492, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:492
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    More about this item

    Keywords

    Redistributive Taxation; Performance-based Contracts; Market Integration JEL Classification: H21; F15; D63;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F15 - International Economics - - Trade - - - Economic Integration

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