Centre for Development Economics
and
Department of Economics, Delhi School of Economics
ANNOUNCE A SEMINAR
Taxing the Job Creators :
Efficient Progressive Taxation with Wage Bargaining
by
Nicholas Lawson
Aix-Marseille School of Economics
Thursday, 6th March 2014 at 3:00 PM
Venue : Seminar Room (First Floor)
Department of Economics, Delhi School of Economics
All are cordially invited
Abstract
The standard economic view of the personal income tax is that it is a distortionary fiscal instrument that exists because it represents an equity-enhancing way of raising revenue to pay for public goods. In this paper, I instead present a model of team formation with wage bargaining in general equilibrium, and show that income taxes that are progressive over most of the income distribution improve efficiency by offsetting the bargaining power held by managers at the top of the distribution, with an efficient top rate of around 60%. I demonstrate that this results is due to a “job-creation” effect, in which high-income individuals have the incentive to work too hard in order to accumulate workers beneath them that they can exploit for rents; job creators should be taxed heavily, not in spite of their job-creation but because of it. I also contribute a new method to solve for optimal taxes, deriving an equation for the derivative of social welfare with respect to marginal taxes which depends in part on a wage-shifting effect of taxes, and discuss how this method could be used empirically.