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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 - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

  • Emmanuel Saez

    (University of California [Berkeley])

  • Stefanie Stantcheva

    (MIT - Massachusetts Institute of Technology)

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
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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