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 o ffsetting 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” e ffect, 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 eff ect of taxes, and discuss how this method could be used empirically.