EconPapers    
Economics at your fingertips  
 

Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities

Thomas Piketty (), Emmanuel Saez () and Stefanie Stantcheva

No 8675, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the problem of optimal taxation of top labour incomes. We develop a model where top incomes respond to marginal tax rates through three channels: (1) the standard supply-side channel through reduced economic activity, (2) the tax avoidance channel, (3) the compensation bargaining channel through efforts in influencing own pay setting. We derive the optimal top tax rate formula as a function of the three elasticities corresponding to those three channels of responses. The first elasticity (supply side) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality across income forms, in which case the second elasticity becomes irrelevant. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate. We then analyze top income and top tax rate data in 18 OECD countries. There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.

Keywords: optimal; income; taxation (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-acc and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8675 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities (2014) Downloads
Working Paper: Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities (2014)
Working Paper: Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities (2014)
Working Paper: Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities (2012) Downloads
Working Paper: Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8675

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=8675

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-03-29
Handle: RePEc:cpr:ceprdp:8675