The Taxation of Superstars

67 Pages Posted: 18 Sep 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)

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Date Written: August 20, 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 provide 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 (August 20, 2015). CESifo Working Paper Series No. 5479, Available at SSRN: https://ssrn.com/abstract=2661406

Florian Scheuer (Contact Author)

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Ivan Werning

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