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The Taxation of Superstars

Florian Scheuer () and Iván Werning

No 21323, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution? To answer this question, we extend the Mirrlees model to incorporate an assignment problem in the labor market that generates superstar effects. Perhaps surprisingly, rather than providing a rationale for higher taxes, we show that superstar effects provides a force for lower marginal taxes, conditional on the observed distribution of earnings. Superstar effects make the earnings schedule convex, which increases the responsiveness of individual earnings to tax changes. We show that various common elasticity measures are not sufficient statistics and must be adjusted upwards in optimal tax formulas. Finally, we study a comparative static that does not keep the observed earnings distribution fixed: when superstar technologies are introduced, inequality increases but we obtain a neutrality result, finding tax rates at the top unaltered.

JEL-codes: H21 H24 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: LS PE
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Published as Florian Scheuer & Iván Werning, 2017. "The Taxation of Superstars," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 211-270.
Published as Florian Scheuer & Iván Werning, 2016. "The Taxation of Superstars," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 211-270.

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