Taxation and Organization of Knowledge
AbstractWe study how income taxation interacts with the organization of knowledge and production, and ultimately the distribution of wages in the economy. A more pro- gressive tax system reduces the time that managers allocate to work, which makes the organization of production less efficient and reduces wages at both tails of the distribution. As a result, lower tail wage inequality increases and upper tail wage inequality decreases.
We show that the optimal tax system is significantly less progressive than if wages were exogenous, because less progressive tax system also generates less unequal wage distribution.