Market Power and Income Taxation

Harvard Law School John M. Olin Center Discussion Paper No. 994

29 Pages Posted: 31 Mar 2019

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2019

Abstract

Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.

Keywords: market power, income taxation, optimal taxation, redistribution, antitrust

JEL Classification: D42, D61, H21, H23, K21, L12, L40

Suggested Citation

Kaplow, Louis, Market Power and Income Taxation (March 6, 2019). Harvard Law School John M. Olin Center Discussion Paper No. 994. Available at SSRN: https://ssrn.com/abstract=3346643

Louis Kaplow (Contact Author)

Harvard Law School ( email )

1575 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-4101 (Phone)
617-496-4880 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/facdir.php?id=32&show=bibliography

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
44
Abstract Views
262
PlumX Metrics