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Incentive effects of bonus taxes


Markus, Lang; Dietl, Helmut (2011). Incentive effects of bonus taxes. In: 15th Annual Conference of "The International Society for New Institutional Economics (ISNIE)", Stanford (USA), 16 June 2011 - 18 June 2011.

Abstract

Several countries have implemented bonus taxes for corporate executives in
response to the financial crisis of 2007-2010. Using a principal-agent model, this
paper analyzes how bonus taxes affect the agent's effort, compensation package,
tax revenue and social welfare. We show that, contrary to its intention, a bonus
tax may even increase the bonus rate and decrease the fixed salary. In addition, a
bonus tax can induce the principal to pay higher bonuses even though the agent's
effort always decreases. Finally, a bonus tax decreases social welfare unless the
social planner places a sufficiently high weight on tax revenue.

Abstract

Several countries have implemented bonus taxes for corporate executives in
response to the financial crisis of 2007-2010. Using a principal-agent model, this
paper analyzes how bonus taxes affect the agent's effort, compensation package,
tax revenue and social welfare. We show that, contrary to its intention, a bonus
tax may even increase the bonus rate and decrease the fixed salary. In addition, a
bonus tax can induce the principal to pay higher bonuses even though the agent's
effort always decreases. Finally, a bonus tax decreases social welfare unless the
social planner places a sufficiently high weight on tax revenue.

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Additional indexing

Item Type:Conference or Workshop Item (Lecture), refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Event End Date:18 June 2011
Deposited On:15 Feb 2012 14:12
Last Modified:20 Aug 2017 11:27
Publisher DOI:https://doi.org/10.1016/j.jebo.2013.02.002
Official URL:http://papers.isnie.org/paper/572.html
Other Identification Number:merlin-id:6352

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