Optimal Taxation with Rent-Seeking
Casey Rothschild and
Florian Scheuer
No 17035, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
Recent policy proposals have suggested taxing top incomes at very high rates on the grounds that some or all of the highest wage earners are engaged in socially unproductive or counterproductive activities, such as externality imposing speculation in the financial sector. To address this, we provide a model in which agents can choose between working in a traditional sector, where private and social products coincide, and a crowdable rent-seeking sector, where some or all of earned income reflects the capture of pre-existing output rather than increased production. We characterize Pareto optimal linear and non-linear income tax systems under the assumption that the social planner cannot or does not observe whether any given individual is a traditional worker or a rent-seeker. We find that optimal marginal taxes on the highest wage earners can remain remarkably modest even if all high earners are socially unproductive rent-seekers and the government has a strong intrinsic desire for progressive redistribution. Intuitively, taxing their effort at a lower rate stimulates their rent-seeking efforts, thereby keeping private returns for other potential rent-seekers low and discouraging further entry.
JEL-codes: D3 D5 D8 E2 E6 H2 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-cta and nep-pub
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Published as Casey Rothschild & Florian Scheuer, 2016. "Optimal Taxation with Rent-Seeking," The Review of Economic Studies, vol 83(3), pages 1225-1262.
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Related works:
Journal Article: Optimal Taxation with Rent-Seeking (2016)
Working Paper: Optimal Taxation with Rent-Seeking (2014)
Working Paper: Optimal Taxation with Rent-Seeking (2014)
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