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Is Tax sharing Optimal? An Analysis in a Principal-Agent Framework

Christelle Viauroux () and Barnali Gupta
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Christelle Viauroux: UMBC,
Barnali Gupta: Miami University

No 09-105, UMBC Economics Department Working Papers from UMBC Department of Economics

Abstract: We study the effects of a statutory wage tax sharing rule in a principal - agent framework with moral hazard (à la Holmstrom, 1979) using the approach of Bose, Pal, Sappington (2007) to model the stochastic relationship between the agent's unobserved effort and his observed performance. The analysis indicates that tax sharing with positive legislated contributions from both the employer and employee does not maximize any of the outcomes -- employee effort, wages, profits or welfare. Moreover, a rule which specifies a corner solution, with 100% of the tax statutorily levied on the employer will maximize effort, expected profit and expected welfare while 100% of the tax statutorily levied on the employee will maximize expected wages.

Keywords: moral hazard; taxes; principal-agent model (search for similar items in EconPapers)
JEL-codes: D8 H2 (search for similar items in EconPapers)
Pages: 5 pages
Date: 2011-10-05
New Economics Papers: this item is included in nep-cta, nep-lab and nep-pbe
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