Bailouts and the Optimal Taxation of Bonus Pay
American Economic Review
vol. 103,
no. 3, May 2013
(pp. 163-67)
Abstract
This paper argues that the possibility of bailouts to financial intermediaries distorts the supply price of capital and creates an argument for taxing financial bonuses separately from other sources of income. We develop a model of financial contracting where intermediaries compete for workers whose actions affect productivity and risk-taking in the financial sector. This derives the second-best optimum and market equilibrium. The optimal taxes that we propose increase both equity and efficiency compared to the pure market outcome.Citation
Besley, Timothy, and Maitreesh Ghatak. 2013. "Bailouts and the Optimal Taxation of Bonus Pay." American Economic Review, 103 (3): 163-67. DOI: 10.1257/aer.103.3.163Additional Materials
JEL Classification
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J33 Compensation Packages; Payment Methods