Working Paper: NBER ID: w21323
Authors: Florian Scheuer; Ivn Werning
Abstract: How are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution? 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 provides 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 are not sufficient statistics and must be adjusted upwards 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 tax rates at the top unaltered.
Keywords: Optimal Taxation; Superstar Phenomena; Earnings Distribution; Elasticity of Earnings
JEL Codes: H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| superstar effects (D29) | conditions for tax efficiency remain unchanged (H21) |
| superstar effects (D29) | increase earnings elasticities (H31) |
| increase earnings elasticities (H31) | downward force for optimal tax rates (H21) |
| superstar effects (D29) | neutral effects on top tax rates (H31) |
| introduction of superstar technologies (Y20) | increased inequality (F61) |
| superstar effects (D29) | optimal tax rates remain unchanged (H21) |