Taxing Top Incomes

Christopher Sleet and Laurence Ales
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Christopher Sleet: Carnegie Mellon University
Laurence Ales: Carnegie Mellon University

No 1478, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We model high income earners as sellers of quality services in a competitive assignment framework. Sellers (high income earners) are differentiated by abil- ity; buyers by their taste for the service. There is assortative matching of buyers and sellers. We show that conventional optimal tax formulas are modified both by a social concern for buyers and an altered mapping of the talent into the income distribution. We quantitatively apply the model to the taxation of CEOs. We find that firm value and CEO income data is consistent with a talent distri- bution that has a thin tail and bounded support and, given sufficient concern for non-CEO firm claimants very low and, perhaps, zero optimal marginal tax on top incomes.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1478

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