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Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities

Listed author(s):
  • Thomas Piketty

    (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC))

  • Emmanuel Saez

    (University of California [Berkeley])

  • Stefanie Stantcheva

    (MIT - Massachusetts Institute of technology [Cambridge])

This paper derives optimal top tax rate formulas in a model where top earners respond to taxes through three channels: labor supply, tax avoidance, and compensation bargaining. The optimal top tax rate increases when there are zero-sum compensation-bargaining effects. We present empirical evidence consistent with bargaining effects. Top tax rate cuts are associated with top one percent pretax income shares increases but not higher economic growth. US CEO "pay for luck" is quantitatively more prevalent when top tax rates are low. International CEO pay levels are negatively correlated with top tax rates, even controlling for firms' characteristics and performance.

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Paper provided by HAL in its series PSE - Labex "OSE-Ouvrir la Science Economique" with number halshs-00944873.

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Date of creation: Feb 2014
Publication status: Published in American Economic Journal:Economic Policy, 2014, 6 (1), pp.230-271. <10.1257/pol.6.1.230>
Handle: RePEc:hal:pseose:halshs-00944873
DOI: 10.1257/pol.6.1.230
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00944873
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References listed on IDEAS
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  1. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
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  37. Anthony Atkinson & Thomas Piketty, 2010. "Top Incomes : A Global Perspective," Post-Print halshs-00754875, HAL.
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  39. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
  40. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc.
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