The Taxation of Superstars

68 Pages Posted: 27 Jul 2015

See all articles by Florian Scheuer

Florian Scheuer

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2015

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.

Suggested Citation

Scheuer, Florian and Werning, Ivan, The Taxation of Superstars (July 2015). NBER Working Paper No. w21323, Available at SSRN: https://ssrn.com/abstract=2636104

Florian Scheuer (Contact Author)

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Ivan Werning

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