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Market Power and Income Taxation

Louis Kaplow

No 25578, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.

JEL-codes: D42 D61 H21 H23 K21 L12 L40 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-com, nep-ind, nep-law, nep-pbe and nep-pub
Note: IO PE PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Louis Kaplow, 2021. "Market Power and Income Taxation," American Economic Journal: Economic Policy, vol 13(4), pages 329-354.

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