Centre for Development Economics
Department of Economics, Delhi School of Economics


Taxing the Job Creators :
Efficient Progressive Taxation with Wage Bargaining


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


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.


back to seminars…