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American Economic Journal: Economic Policy: Vol. 6 No. 1 (February 2014)

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Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities

Article Citation

Piketty, Thomas, Emmanuel Saez, and Stefanie Stantcheva. 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities." American Economic Journal: Economic Policy, 6(1): 230-71.

DOI: 10.1257/pol.6.1.230

Abstract

This paper derives optimal top tax rate formulas in a model where top earners respond to taxes through three channels: labor supply, tax avoidance, and compensation bargaining. The optimal top tax rate increases when there are zero-sum compensation-bargaining effects. We present empirical evidence consistent with bargaining effects. Top tax rate cuts are associated with top one percent pretax income shares increases but not higher economic growth. US CEO "pay for luck" is quantitatively more prevalent when top tax rates are low. International CEO pay levels are negatively correlated with top tax rates, even controlling for firms' characteristics and performance.

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Authors

Piketty, Thomas (Paris School of Economics)
Saez, Emmanuel (U CA, Berkeley)
Stantcheva, Stefanie (MIT)

JEL Classifications

D31: Personal Income, Wealth, and Their Distributions
H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H26: Tax Evasion
M12: Personnel Management; Executives; Executive Compensation

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