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The taxation of superstars


Scheuer, Florian; Werning, Iván (2016). The taxation of superstars. Quarterly Journal of Economics, 132:211-270.

Abstract

How are optimal taxes affected by superstar phenomena? 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 provide 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 must be adjusted upward 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 optimal taxes unaltered

Abstract

How are optimal taxes affected by superstar phenomena? 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 provide 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 must be adjusted upward 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 optimal taxes unaltered

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Taxation; labor market; direst costing; corporate profits; elasticity (economy); economists; neutrality
Language:English
Date:November 2016
Deposited On:29 May 2017 08:32
Last Modified:21 Nov 2017 19:31
Publisher:Oxford University Press
ISSN:0033-5533
Additional Information:Also published as NBER Working Paper 21323 (July 2015).
Publisher DOI:https://doi.org/10.1093/qje/qjw036
Related URLs:http://www.nber.org/papers/w21323

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Embargo till: 2018-11