Taxing Atlas: Executive Compensation, Firm Size and Their Impact on Optimal Top Income Tax Rates

45 Pages Posted: 4 Aug 2015 Last revised: 15 Dec 2016

Laurence Ales

Carnegie Mellon University - David A. Tepper School of Business

Antonio Andres Bellofatto

University of Queensland - School of Economics

Jessie Jiaxu Wang

Arizona State University (ASU) - W.P. Carey School of Business

Date Written: December 14, 2016

Abstract

This paper studies the optimal taxation of top labor incomes. Top income earners are modeled as managers who operate a span of control technology as in Rosen (1982). Managers are heterogeneous in their talent. Effort and talent of the manager are privately observed. Managerial talent increases managers’ productivity of effort and overall firm productivity, creating a scale-of-operations effect. A tax formula for optimal taxes is derived linking optimal marginal tax rates to preferences and technology. The model is calibrated using US firm level data. Our quantitative results suggest that optimal top tax rates are in line with the current US tax code and significantly lower than previous studies ignoring the scale-of-operations effect have shown.

Suggested Citation

Ales, Laurence and Bellofatto, Antonio Andres and Wang, Jessie Jiaxu, Taxing Atlas: Executive Compensation, Firm Size and Their Impact on Optimal Top Income Tax Rates (December 14, 2016). Available at SSRN: https://ssrn.com/abstract=2639334 or http://dx.doi.org/10.2139/ssrn.2639334

Laurence Ales (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Antonio Andres Bellofatto

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Jessie Jiaxu Wang

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.jiaxuwang.com

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