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Taxing the job creators: Efficient taxation with bargaining in hierarchical firms

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  • Nicholas Lawson

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales)

Abstract

Economists typically view personal income taxes as a tradeoff between distortionary effects on labour supply and desirable effects on the income distribution. However, when wages deviate from marginal product, there is an efficiency rationale for income taxation. In the empirically relevant setting of wage bargaining within hierarchical firms, the efficiency case for taxing the manager at the top of the firm depends on a "job-creation" effect: if wages are too low and increased labour supply allows managers to supervise larger firms and thus collect larger rents, they will work too hard to create jobs at their firm. It may then be efficient to tax the "job creators" because of their job-creation activity. If bargaining compresses the wage distribution for workers, the efficient tax schedule is V-shaped and deviates significantly from zero in a model calibrated to the U.S. income distribution. For a planner with redistributive motives, wage bargaining similarly raises optimal marginal tax rates at the top and bottom of the distribution, while decreasing them in the middle.

Suggested Citation

  • Nicholas Lawson, 2019. "Taxing the job creators: Efficient taxation with bargaining in hierarchical firms," Post-Print hal-02510497, HAL.
  • Handle: RePEc:hal:journl:hal-02510497
    DOI: 10.1016/j.labeco.2018.11.002
    Note: View the original document on HAL open archive server: https://hal-amu.archives-ouvertes.fr/hal-02510497
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    1. Florian Scheuer & Joel Slemrod, 2020. "Taxation and the Superrich," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 189-211, August.

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    More about this item

    Keywords

    Optimal income taxation; Efficiency; Wage bargaining; Hierarchical firms; Job creators;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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