Optimal Taxation with Rent-Seeking
By Casey G. Rothschild, Florian Scheuer. Social Science Research Network, 2016
123 citations recorded by the source corpus.
We develop a framework for optimal taxation when agents can earn their income both in traditional activities, where private and social products coincide, and in rent-seeking activities, where private returns exceed social returns either because they involve the capture of pre-existing rents or because they reduce the returns to traditional work. We characterize Pareto optimal income taxes that do not condition on how much of an individual's income is earned in each of the two activities. These optimal taxes feature an externality-corrective term, the magnitude of which depends both on the Pigouvian correction that would obtain if rent-seeking incomes could be perfectly targeted and on the relative impact of rent-seeking externalities on the private returns to traditional and to rent-seeking activities. If rent-seeking externalities primarily affect other rent-seekers, for example, the optimal correction lies strictly below the Pigouvian correction. A calibrated model indicates that the gap between the Pigouvian and optimal correction can be quantitatively important. Our results thus point to a hefty informational requirement for correcting rent-seeking externalities through the income tax code.
Subfields: Accounting, Economics and Econometrics, Gender Studies
View Paper: https://www.semanticscholar.org/paper/adea5175c99513b2fe9eee8072895c0d22924459
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Citations in the corpus
- The Promise of Positive Optimal Taxation (2014, background): “Bourguignon and Spadaro (2012) take the former approach to calibrating thewelfareweights in a standardmodel, as do Spadaro et al. (2012); Bargain et al. (2011, 2013); Zoutman et al. (2013a, 2013b); Hendren (2014); and Lockwood and Weinzierl (2014).”